Document of

The World Bank FILE COPYFOR OFFICIAL USE ONLY

Report No. P-3029-TU

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF TURKEY

FOR A

FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECT

April 15, 1981

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TURKEYCURRENCY EQUIVALENTS

Currency Unit Jan. 1980 Oct. 1980 Jan. 27, 1981 Mar. 22, 1981

US Dollar /1 = TL 70.0 /3 TL 83.50 /3 TL 91.0 /3 TL 95.95

TL 1 = US$ 0.01 US$ 0.01 us$ 0.01 US$ 0.01

/1 Since January 1980, the rate has been adjusted for the differentialinflation between Turkey and its major trading partners. TL 91/$1.00was used for this report.

/2 Except for imports of crude oil, petroleum products and fertilizer rawmaterials, and exports of agricultural products benefitting fromofficial price supports, for which it was TL 35 = $1.00.

/3 Except for imports of fertilizers and insecticides/pesticides, as wellas raw materials and inputs for their manufacture, for which the ratewas TL 55/$1.00 from January 1980, TL 70.0/$1.00 from October 1980,TL 78.6/$1.00 from January 31, 1981, and TL 83.1/$1.00 from February 2,1981.

FISCAL YEAR

Republic of Turkey : March 1 to February 28

Azot Sanayii T.A.S : January 1 to December 31

Istanbul Gubre Sanayii A.S. ; January 1 to December 31

Gubre Fabrikalari T.A.S. ; January 1 to December 31

ABBREVIATIONS AND ACRONYMS

Azot Azot Sanayii T.A.S. (Nitrogen Industries)CAN Calcium ammonium nitrateDAP Di-ammonium phosphateDONATIM Turkiye Zirai Donatim Kurumu (Turkish

Agriculture Supply Agency)Gubre Gubre Fabrikalari T.A.S. (Fertilizer

Manufacturing Company)ha hectareIGSAS Istanbul Gubre Sanayii A.S. (Istanbul

Fertilizer Company)IPRAS Istanbul Petrol Rafinerisi A.S.PPF Project Preparation FacilitySEE State Economic EnterpriseSEKER Turkiye Seker Fabrikalari (Turkish Sugar Co.)SPO State Planning OrganizationTEK Turkish Electricity AuthorityTKI Turkish Coal AuthorityTPAO Turkish Petroleum Corporationtpd Tons per daytpy Tons per year

TSP Triple super phosphate

FOR OFFICIAL USE ONLY

TURKEY

FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECT

LOAN AND PROJECT SUMMARY

Borrowves Republic of Turkey.

Beneficiaries; 1. Azot Sanayii T.A.S. (Azot)2. Istanbul Gubre Sanayii A.S. (IGSAS)3. Gubre Fabrikalari T.A.S. (Gubre)

Amount: US$110.0 million equivalent in various currencies.

T!t""l Seventeen years, including four years of gracewith interest at 9.6 percent per annum.

Relending Terms; The Borrower will on lend the equivalent of $69.0million to Azot, $20.6 million to IGSAS, and $20.0million to Gubre, all for twelve years includingfour years of grace, with interest at 10.6 percentper annum. The Borrower will retain $0.4 millionfor the marketing study. Beneficiaries will bearthe foreign exchange risk.

Project Description: The project aims at increasing production,productivity and energy efficiency in selectedfertilizer facilities in Turkey through energysaving, rehabilitation and rationalizationinvestments supported by appropriate technicalassistance and institutional improvements.

The project consists of; (a) the rehabilitationof Azot's 340,000 tons per year (tpy)lignite-based Kutahya II calcium ammonium nitratefertilizer plant; (b) rehabilitation andmodernization of Azot's 220,000 tpy triplesuperphosphate and 230,000 tpy di-ammoniumphosphate fertilizer complex at Samsun; (c)modifications and conversion to use lower costrefinery gas to replace part of the napthafeedstock and fuel for the IGSAS 511,500 tpy ureafertilizer plant; (d) rehabilitation andmodernization of Gubre's Yarimca 200,000 tpytriple superphosphate and 200,000 tpy complexfertilizer plants, and the construction of a new250,000 tpy sulphuric acid plant at this facilityto balance production; (e) training of fertilizersubsector personnel; and (f) provision of about1,500 man-months of technical assistance andengineering services to design and implement plantimprovements, operate the Azot plants, prepare and

implement financial management and organizational

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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improvements in Azot, and undertake a fertilizermarketing and pricing study.

The major benefits of the proposed project aresubstantially increased production from therationalized facilities, lower energy costs, andmore cost-efficient operations. By projectcompletion, an estimated 623,000 tpy additionalnitrogen and phosphate fertilizer will be producedat lower unit cost, and $118 million per year offoreign exchange saved. Technical risks areconsidered moderate, as the project is dealingwith existing plants and commercially proventechnology. The main risks are delays inimplementation and increased costs. These havebeen mitigated by providing, where necessary,expatriate specialists to strengthen theoperational staff and by the involvement ofexperienced engineering firms.

Estimated Cost;Local Foreign Total----------$ Million--------

I. Rehabilitation and Energy Savingl/

Azot-Kutahya II 27.9 34.9 62.8Azot-Samsun 35.9 19.9 55.8IGSAS 8.5 20.2 28.7Gubre-Yarimca 24.4 20.0 44.4Project Preparation (PPF) 0.0 0.6 0.6

Sub-total 96.7 95.6 192.3/1

II. Training 0.5 1.5 2.0III. Management Improvement Program 1.0 2.5 3.5IV. Marketing Study 0.3 0.4 0.7V. Incremental Working Capital 1.6 3.0 4.6

Total Project Cost 100.1 103.0 203.1

Of which:

Physical Contingency (6.9) (6.8) (13.7)Price Contingency (20.7) (21.0) (41 ..7)

Financial charges during construction 5.5 28.0 33.5

Total Financing Required 105.6 131.0 236.6 2/

1/ Including 27 percent price and 10 percent physical contingencies and$600,000 of advances under the Project Preparation Facility (P-027-TU).

2/ Includes taxes of about $2 million.

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Financing Plan Local Foreign Total--------- Million---------

Bank 0.0 110.0 110.0

Internally genrte t4UAjot 390 0.0 39,0IGSAS 9.7 5.3 15.0Gubre 25.9 6.7 32.6

Government 31.0 9.0 40.0

Total 105.6 131.0 236.6

Estimated Disbursement: ----------US$ Million-----------BY 1982 1983 1984 1985 1986

Annual 21.0 58.0 14.5 14.0 2.5Cumulative 21.0 79.0 93.5 107.5 110.0

Economic Rate of Return: 43 percent.

Appraisal Report: Report No. 3377-TU, dated April 9, 1981.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRDTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO

THE REPUBLIC OF TURKEYFOR A FERTILIZER RATIONALIZATION AND ENERGY SAVING PROJECT

1. I submit the following report and recommendation on a proposedloan to the Republic of Turkey for the equivalent of US$110 million to helpfinance the foreign exchange costs of a Fertilizer Rationalization andEnergy Saving Project. The loan would have a term of 17 years including 4years of grace, with interest at 9.6 percent per annum. The equivalent ofabout $69.0 million, $20.6 million and $20.0 million, respectively, wouldbe onlent to Azot Sanayii, Istanbul Gubre Sanayii, and Gubre Fabrikalarifor 12 years including 4 years of grace, at 10.6 percent per annum.

PART I - THE ECONOMY _/

2. A Special Economic Mission visited Turkey in April/May 1979 toevaluate the Fourth Five-Year Plan (1979-1983). Its report entitled "Turkey;Policies and Prospects for Growth" (No. 2657a-TU dated December 12, 1979) wasdistributed to the Executive Directors on December 26, 1979 and its Postscripton March 24, 1980. A small mission visited Turkey in May 1980 to updateinformation and Bank analysis of the country's economic prospects. Itsfindings are reflected below. Annex I contains the Basic Country Data.

Development Trends and Policies

3. As the result of a strong commitment to rapid growth and moderni-zation, GDP increased at an average annual rate of 6.4 percent, 6.7 percentand 7.2 percent respectively, during the First Plan (1963-67), Second Plan(1968-1972), and Third Plan (1973-1977) periods. This compares favorably withthe experience of 55 "middle income" developing countries, whose GDP growthaveraged a little under 6.0 percent per annum between 1960-1978. Moreover,the relatively high growth rate in Turkey was achieved without significantdeposits of oil or other important natural resources.

4. Growth was accompanied by significant social changes. Althoughpopulation grew annually at 2.5 percent, rapid GDP growth allowed substantialadvances in per capita income. However, rising income levels were not accom-panied by better income distribution. Although basic needs have been met,significant sectoral and regional inequalities in income continue.

1/ This Part is identical to Part I of the President's Reports on the LaborIntensive Industry Project (P-2956-TU) dated February 11, 1981, and on theSecond Fruit and Vegetable Project (P-2985-TU) dated March 10, 1981.

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5. The public sector has played a key role in Turkey's development.Between 1963-1977, its share in total fixed investment fluctuated around 50percent, and its share of fixed investment in manufacturing increased from 21to nearly 49 percent. The public sector dominates basic industries. Never-theless, the private sector has emerged as an increasingly important anddynamic element in the economy and is beginning to shift its orientation fromconsumer goods to intermediate and investment goods, and from the domesticmarket to exports. Private sector investment increased at nearly 11.5 percentper year in real terms during 1967-1977 compared to an average annual increaseof only 4.8 percent between 1963 and 1967.

6. Turkish development between 1963-1977, however, exhibited a number ofstructural characteristics which are of considerable relevance for futuredevelopment policy. First, for a country of Turkey's size and per capitaincome, it has a very low level of exports relative to GDP--about 4 percent in1977--as against a more or less "normal" import level of around 20 percent formiddle income countries; this highlights the vulnerability of the balance ofpayments and the importance of export development to sustain the needed inflowof foreign exchange resources. Second, while the level of investment relativeto GDP increased rapidly and compares favorably with other developingcountries, mobilization of domestic savings has lagged; the ratio of domesticsavings to GDP, is well below the average for middle income countries; thegrowing gap between domestic savings and investment led in the mid-1970s to arelatively high level of external borrowing, and domestic inflationarypressures emanating from excess demand and deficit financing. Third, arelatively high proportion of the labor force is still in agriculture, reflec-ting significant disguised unemployment and the need for accelerated jobcreation in non-agricultural activities; that in industry is low compared toother large middle income countries; furthermore, the relatively inadequategeneration of additional employment has become more serious following the nearcessation of workers' migration to Europe since 1974. Fourth, despite thegrowing dynamism of the private sector, the industrial scene is dominated byinefficient State Economic Enterprises (SEEs) which have not been exposed tomarket forces and serve not only economic but social goals; their growingdeficits have imposed an inflationary burden on the budget, while their ambi-tious investment programs were financed through Central Bank borrowings, sincetheir controlled prices have, until recently not enabled most of them togenerate sufficient cash to cover costs or investment expenditures. Fifth,due to the successes achieved since the early sixties through economicplanning, there has been an increasing tendency to plan to a micro-level andseek to achieve changes through administrative fiat; however, the economy hasreached a stage where such excessive reliance on this becomes counter produc-tive; planning needs to be increasingly geared towards setting a framework inwhich market forces could secure the desired economic results in both thepublic and private sectors.

The Economic Crisis and Stabilization Efforts

7. These institutional and structural characteristics of the economymade it particularly vulnerable to the sharp increase in import prices (inclu-ding oil) in 1974 and the simultaneous occurence of recession, inflation and

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rising unemployment in the industrial countries. These factors played a keypart in the deterioration of the economy. However, the politically weakgovernments, their policies in response to these factors and their efforts topursue a high growth policy despite the worsening international environmentthrough increasing reliance on short-term external financing, together createdforces that brought about the economic crisis in mid-1977 which is still con-tinuing. The detailed analysis of this crisis, and of Turkey's attempts tostabilize the economy in the short-run up to late 1979, is provided in theabovementioned Special Economic Report and Postscript, as well as in paras. 8to 15 of the President's Report (dated February 29, 1980) for the StructuralAdjustment Loan approved by the Board on March 25, 1980.

8. Despite domestic and international efforts, 1979 was another diffi-cult year for the economy; production stagnated, unemployment increased,inflation accelerated, the balance of payments position remained tight, exportperformance was poor, severe import rationing continued and the external debtposition remained precarious. Policy initiatives taken till then provedinadequate to reverse the tide, as political and economic uncertainties con-tinued to erode the impact of the measures taken.

9. Compared to a growth of 3 percent in 1978, GDP stagnated in 1979.Value added in agriculture increased by 2.5 percent, and in services by about1 percent, but in industry value added declined by about 2 percent. In agri-culture, further growth was held back by a sizeable decline in production ofindustrial crops, mainly cotton, and a bad olive crop; the area cultivateddeclined, due to shortages of fuel and fertilizers. In industry, worseningshortages of imported raw materials and energy, especially oil, led to adecline in production of about 3.5 percent. Production of manufacturing SEEsdeclined by about 2 percent, and was manifested by decreases of 28 percent incement production, 9 percent in steel production and 51 percent in certainpetroleum production and processing operations. In contrast, the constructionand transport sectors grew modestly, but insufficiently to overcome thedecline in other sectors. This stagnation was accompanied by unprecedentedinflation of about 65 percent in 1979.

10. The overall public sector deficit increased from TL 80 billion in1978 to TL 132 billion in 1979. It was financed mainly by borrowing from theCentral Bank (TL 70 billion). The consolidated budget and the operations ofthe SEEs were almost equally responsible for the enlarged deficit. Thedeterioration in the consolidated budget was caused mainly by a sharp increasein transfers to the SEEs, which in 1979 amounted to TL 89 billion.

11. On the external account, there was a marginal decline in the value ofrecorded exports of goods to $2.3 billion, although in volume terms, exportsactually declined by an estimated 17 percent. The value of merchandiseimports was about 10 percent higher than the previous year at $5.1 billion;but due to substantial price increases, the volume is estimated to havedeclined by 19 percent. The current account deficit in 1979 was the same asin 1978, i.e. around $1.7 billion.

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12. Turkey achieved some success in diversifying the sources, and

increasing the level, of M&LT commitments, including $250 million in project

credits from the Saudi Fund. Perhaps the most important arrangement arrived

at was the May 1979 OECD sponsored pledging of $1.45 billion in special assis-

tance, including about $900 million in M&LT bilateral credits and export

credits, besides $407 million of medium-term credits from commercial banks

(finalized in September 1979). However, actual capital inflows were about the

same as the previous year (see para. 18 for rescheduling in 1980).

13. Also, throughout 1979, Turkey made a major effort to alleviate the

critical burden of external debt through: (a) slowing the growth of shortterm

liabilities; (b) debt relief arrangements; and (c) efforts to pursue new

sources of credits, especially M&LT credits. The first debt relief operation,

arranged through the OECD Consortium for Turkey in May 1978, involved consoli-

dation of $1.14 billion in arrears on guaranteed short-term and bilateral M&LT

debt, as well as amounts due over the thirteen month period May 21, 1978 to

June 30, 1979. A second major rescheduling took place in July 1979, involving

payments of about $1.02 billion on official bilateral and private guaranteed

credits due between July 1, 1979 and June 30, 1980. A third major arrange-

ment, finalized in July and August 1979 with commercial banks, rescheduled

convertible lira deposits ($2.3 billion), banker's credits ($429 million) and

third party reimbursement credits ($300 million). About $317 million in oil

debt was also rescheduled. The total amount thus rescheduled was about $5.5

billion. This was perhaps the largest debt rescheduling operation anywhere.

Even so, net arrears of about $500 million emerged given the remaining high

debt service burden in 1979.

January 1980 Structural Adjustment Program and Policy Objectives

14. Against this background, it was quite clear that drastic and painful

stabilization measures were not enough to reverse the adverse economic tide.

What was needed, was a major program of long-term structural adjustments, if

the economy was first to be nursed back to normalcy and then to resume viable

growth. Such a bold and far-reaching program of policies to effect structural

adjustments in the economy over the medium term was announced on January 25,

1980, accompanied by initial measures to implement adjustments in certain

critical areas. These were described and discussed in detail in the Presi-

dent's Report (No. P-2725-TU dated February 29, 1980) for the Structural

Adjustment Loan. The policy objectives underlying, the program, and the

measures it initiated, represent a basic departure from past planning objec-

tives. Turkey has undertaken, through it, the essential first steps to foster

major structural and institutional changes in the key economic areas.

15. The program's stated goal of "bringing about a major reorientation of

the economy" calls for: (i) greater reliance on market mechanisms and forces,

by both the public and private sectors; (ii) reduction in the rate of infla-

tion; (iii) improved management of the balance of payments and external debts;

(iv) policies to encourage the public and private sectors to be efficient and

internationally competitive; (v) the implementation of rational exchange ratepolicies and of measures encouraging exports; (vi) domestic resource mobiliza-

tion efforts to be substantially augmented through increased tax efforts,

realistic SEE pricing, and increased private savings via the banking systemand the development of financial markets; (vii) an investment policy aimed atfuller utilization of existing productive capacity and completion of ongoingprojects requiring modest inputs, and tailored to scarce resources; and(viii) conditions to stimulate foreign investments in oil, industry and agri-culture.

16. Successful implementation of this program over the medium-term, willrequire persistence and courageous action on the part of the Government. Itwill also call for substantial support from the international community, with-out which it is unlikely to succeed. However, if Turkey implements it vigor-ously, and periodically makes critical in-depth reviews as to the impact ofthe measures and what further modifications and adjustments are needed toachieve the program's economic goals, it will strengthen the basis forTurkey's creditworthiness and re-establish a path of stable economic growth.

17. Following the announcement of this program, the IMF approved a modi-fication of the terms of the July 1979 Standby Arrangement and the release oflarger second and third tranches on February 21 and March 24, 1980. In addi-tion, SDR 71.6 million ($93 million) in compensatory financing for exportshortfalls was provided on February 21, 1980, together with the modificationof the Standby. Together, this resulted in the provision of $301 million (SDR231.6 million), with the remaining $26 million (SDR 20 million) to be providedin June. However, on June 18, this Standby was cancelled. Instead, the IMFBoard approved a new three-year Standby Arrangement involving SDR 1.25 billion($1.63 billion), with SDR 460 million ($600 million) in the first year, SDR400 million ($522 million) in the second year and SDR 390 million ($509million) in the third year. The key conditions of the new Standby are that;(i) exchange rate policy is to be kept more flexible; (ii) the financialposition of the public sector is to be improved, mainly as a result of therestructuring of the operational policies of the SEEs; (iii) monetary condi-tions are to be kept extremely tight, as a result of the observance of limitson Central Bank lending; and (iv) interest rates are to be adjusted to reflectmarket conditions.

18. In addition, Germany took the lead in organizing the provision ofsizeable external assistance, as well as a further debt relief operation. Inmeetings under OECD auspices in March and April, $1.16 billion of bilateralaid was pledged, with much more rapid disbursements than in 1979. The Bankalso supported OECD's and IMF's efforts through a $200 million StructuralAdjustment Loan in March 1980. Furthermore, about $2.5 billion in servicepayments to OECD countries on public and publicly-guaranteed debts falling dueprior to June 1983 were rescheduled, again under OECD auspices, in July 1980.This included all arrears up to June 30, 1980, payments due prior to June 1983on debt not previously rescheduled, and payments due up to June 1981 on debtalready rescheduled in 1978 or 1979. Ninety percent of these sums wererescheduled over 8 to 10 years, including 4 to 5 years of grace. With thesedevelopments, Turkey secured debt relief estimated at $1.1 billion in 1980 andanother $0.8 billion in 1981, with smaller amounts thereafter. The only size-able new commitment in recent months has been a $250 million cash loan on 15

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year low-interest terms from Saudi Arabia, of which $100 million has been dis-bursed, with another $100 million scheduled for December and the balance forMarch 1981. Turkey has approached leading commercial banks to secure asoftening of the terms of the August 1979 rescheduling agreement. After con-siderable delay due to wariness on the part of banks both of a new reschedu-ling and, to some extent, of extending new credit to Turkey, a modest syndi-cated loan is under discussion. The Government will try to reduce to theextent possible the current and prospective large net outflow of funds to thecommercial banks.

Economic Developments in 1980 and Outlook for 1981

19. As expected, the initial impact of the January 1980 package has beento exacerbate many of the economic pressures. Uncertainty about the course offuture policies and about the timing and pace of economic recovery, as well astight monetary conditions aimed at reducing aggregate demand, have slowedinvestments and economic growth. Devaluation and the removal of price con-trols on both private business and SEEs, while necessary to alleviate allo-cative distortions in the economy, contributed to a large initial upsurge inthe rate of inflation. Also as expected, the financial rehabilitation of theSEEs and their reorientation to market conditions has only begun, and willrequire more fundamental changes than price liberalization alone over themedium term. Budgetary transfers to the SEEs to cover remaining operatingsubsidies and investment expenditures have continued to rise. The budgetposition as a whole continues to be weak. It is still too early to saywhether the initial adjustment phase is over. However, preliminary datasuggest that the worst may be past. Inflation has come down sharply, andindeed more rapidly than expected (next paragraph); the impact of higherimport prices (especially for oil) has been alleviated (though so far only for1980) by a commensurate increase in capital inflows; and 1980 saw a verymodest resumption of economic growth.

20. For the full year, GDP growth is likely to be between zero and 2 per-cent, with growth in agriculture of about 2.5 percent, but stagnation inindustry. Public investment has continued to fall in real terms for lack offinancial resources, and private investment remains depressed. Unemploymentis still rising, and real disposable incomes are falling. As mentioned above,inflation--which averaged over 100 percent on an annual basis in early1980--has since slowed considerably, and expectations are that over theremainder of the year it will be about 2 percent per month. The fiscal andmonetary situation remains difficult. There has been a substantial increasein Government expenditures over previous forecasts, in line with inflation.However, there is evidence of tax revenues lagging behind inflation, and sub-stantial arrears have built up in tax collection. SEE operations will show asmall profit this year after several years of mounting deficits. However, tofinance their investments and debt repayments, budgetary transfers to SEEswill rise again to TL 138 billion. As a result, the budget deficit is likelyto be TL 155 billion in spite of a further accumulation of Government arrearsvis-a-vis the private sector. Pressures have therefore built up to expand

Central Bank credit, which is strictly limited under the IMF Standby Arrange-ment. Nevertheless, the first discussions under the Standby were satisfac-torily concluded at the end of August, and the second drawing was made avail-able on schedule on September 29. However, IMF Board agreed to a smallincrease in the ceilings on Central Bank net domestic assets and credit to thepublic sector to accommodate crop purchases by the Soil Products Office(particularly of wheat) without impinging on the availability of financing forthe private sector, especially for exports.

21. The balance of payments position remains quite tight. Over the firsteight months of 1980, the value of merchandise exports was only 6 percenthigher than in the corresponding period of 1979. However, taking into accountthe seasonal rise in agricultural exports, the end of various labor disputesin industry, and the rising trend in production, and provided markets recentlyestablished in the Middle East are not long disrupted by the Iran-Iraq war,the Government projects exports of $2.8 billion for the year as a whole, com-pared to $2.3 billion last year. While the value of merchandise imports isexpected to be considerably higher than in 1979--$6.7 billion (including $3.2billion for oil) as against $5.1 billion, the volume increase will be negli-gible due to increases in import prices, especially for oil. As a result,fairly severe import rationing continues. Workers' remittances have increasedstrongly this summer and should reach $1.8 billion for the year as a whole.Even so, it is estimated that the current account deficit will increase from$1.7 billion in 1978 and 1979 to $3.1 billion in 1980. Capital inflows willalso be higher than last year, with gross public M&LT disbursements expectedto be about $2.2 billion, given the Government's concerted effort to disbursethe pipeline of OECD sponsored external assistance pledged in May 1979 andApril 1980. Moreover, the massive July rescheduling (para. 18) has eased theexternal debt position considerably.

22. The outlook for 1981 is slightly more promising, although the balanceof payments position is likely to remain extremely difficult. It is too earlyto predict the impact the Iran-Iraq war may have, given that these twocountries normally provide nearly 55 percent of Turkey's oil imports on favor-able terms. Assuming the impact can be mitigated, the growth rate of real GDPis projected to be about 3 percent, with value added in agriculture andindustry growing on the order of 3 and 4 percent respectively. Investment islikely to grow only by about 1 percent, after real falls in recent years. TheGovernment hopes to reduce the rate of inflation substantially again. Theexternal position is expected to remain tight. Exports should grow by about20 percent to $3.4 billion, and imports by about 16 percent to $7.8 billion,in nominal terms. As in 1980, the volume increase in imports is likely to benegligible due to increases in import prices, especially for oil, and henceimport rationing will have to continue. With only a modest rise in servicereceipts and workers' remittances, the current account deficit in 1981 isexpected to be $3.6 billion, or $500 million more than in 1980. Turkey hasalready begun to make preparations to meet the very large financing gap in1981, and hopes to secure considerably higher capital inflows than in 1980,particularly gross public M&LT disbursements which need to be around $3.5billion. Apart from the Bank, IMF and commercial bank loans arranged or beingprocessed, the Government intends to seek further special aid from OECD

members in 1981.

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Turkey's Medium-Term Economic Prospects

23. The international oil situation, following the substantial end-1979

price increases, has a major impact on future prospects. Even if Turkey

allows only a marginal increase in oil imports during 1980-1985 to sustain a

gradual resumption of growth, the oil import bill is estimated to increase

from $3.2 billion in 1980 to $6.1 billion by 1985; as a percentage of merchan-

dise exports and non-factor services, this is equivalent to about 83 percent

in 1980 and is likely to remain at about 70 percent until 1985. The pressure

this will exert on Turkey's already difficult balance of payments position is

obvious. The projected current account deficit as a percent of GNP in current

dollars increased from 3 percent in 1979 to about 8 percent in 1980 and is

projected to remain at or above 5 percent until 1984. Considering the limita-

tion on available external assistance and given the need for continued sound

external debt management, Turkey can sustain the projected annual current

account deficits of the order of $3-3.5 billion annually in the short run,

given further quick-disbursing assistance in 1981; the deficits are projected

to decline to a sustainable $2.5 billion annually in the next few years.

24. Taking into account international inflation and the substantial obli-

gations for debt amortization, despite the July 1980 debt rescheduling, this

situation necessitates a large and sharply increasing annual average gross

inflow of foreign capital, rising to $4 to 5 billion during the next five

years. Such major inflows of foreign capital can only be sustained on the

basis of prudent external debt management. In any case, debt service obliga-

tions are likely to remain high over the coming 5 years. In 1979, total debt

service payments were 26 percent of exports of goods, non-factor services and

workers' remittances after rescheduling payments. The ratio is projected to

rise to around 45 percent in 1984, taking account of the July 1980 debt

rescheduling. This, however, should represent the culmination of the finan-

cial consequences of the present crisis and the debt burden should remain

manageable, provided the structural adjustment policies are successfullyimplemented and the export drive is sustained.

25. Given the accumulation of economic problems of the last three years,

the political difficulties, the significantly increased cost of oil imports,

and the difficulty of significantly increasing the net inflow of capital, Bank

projections suggest that GDP growth in real terms may average around 4 percent

p.a. with a real growth of exports about 9 percent p.a. during 1980-1985.

These growth rates appear attainable, assuming continuation of appropriate

economic measures (including those announced in January 1980), and taking into

account the low export base and present underutilization of capacity.

26. The recent political changes do not change these expectations regar-

ding economic developments. The military government which assumed power on

September 12 is determined to pursue the program of structural adjustments

announced in January 1980, as well as economic policies and commitments agreed

with the Bank, IMF and members of the OECD Consortium for Turkey. Indeed, two

days after the takeover, both the Bank and the IMF were officially informed of

this decision. A civilian Cabinet, responsible to the military's new National

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Security Council, has been named, with the principal architect of the recenteconomic policy reforms, Mr. Ozal, assuming the position of Deputy PrimeMinister for economic affairs. Its program confirms the commitment to con-tinue implementing the January 1980 program, and the intention to introducethose portions of it which have been blocked hitherto by deadlock inParliament.

PART II - BANK GROUP OPERATIONS IN TURKEY

27. A large lending program for Turkey was begun following the intro-duction of its 1970 Stabilization Program. Despite the slowdown caused by the1977-78 crisis, the Bank/IDA have lent to date $2,815 million, through 65projects. Agriculture accounts for 22 percent of funds lent, industry andDFCs for 35 percent, power for 13 percent and urban development,transportation, education and tourism for the rest. Annex II contains asummary statement of Bank loans, IDA credits and IFC investments as of March31, 1981, with notes on the execution of ongoing projects.

28. The implementation of private sector projects has been satisfactory.Political instability, limited coordination amongst ministries, staffingproblems and the serious external and domestic financial crisis since 1977have seriously affected project implementation in the public sector. A systemof joint project reviews between Turkey and the Bank was instituted in June1975. This has resulted in distinct, but modest, improvements. As of June1980, disbursements increased to 70 percent of appraisal estimates against 51percent in June 1975. The broad reform of the public sector launched inJanuary 1980, and pursued with new measures since, allows cautious optimismthat performance can be gradually improved further, provided it is not erodedby new factors, including shortages of resources.

29. Bank lending is aimed at supporting the economic policies initiatedin January 1980, especially; (a) the pursuit of an export oriented develop-ment strategy; and (b) domestic economic policies aimed at establishing amacro-economic balance, increasing domestic savings, restraining publicinvestment and reorienting it to reflect the new Government priorities(completion of ongoing projects, emphasis on quick-yielding new investments,and balance of payments impact). The Bank has discussed with the Governmenthow its overall lending can best contribute to the latter's medium-termobjectives, and help remove past policy and institutional constraints. Aseries of structural adjustment loans are envisaged, at the Government'srequest, to support its program of structural adjustments to be implemented inthe medium-term. Agriculture, industry and energy will be the key sectors forproject lending. In agriculture, projects emphasize livestock, exports, andrural development; in industry (including DFCs), the emphasis is on promotionof exports and employment, and the gradual strengthening of the SEEs. Energyprojects underway are in power generation based on domestic hydro and ligniteresources; future projects will emphasize the oil/gas sub-sector and

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coal/lignite. Projects for urban development and public utilities maysupplement these efforts. The close macroeconomic and sector dialogueestablished with the Government in recent years is expected to be pursued onkey issues. The economic and sector work planned over the next several monthsincludes special studies of the public investment program, ofindustrialization and foreign trade strategy, and of the energy sector, andcompletion of sector memoranda on agriculture and industry. In addition, theprogress made in fostering structural adjustment will be monitored in thecontext of each future structural adjustment loan.

30. A supplement to the first Structural Adjustment Loan, the Bati RamanEnhanced Oil Recovery Field Demonstration Project and the PetroleumExploration Project, were approved by the Executive Directors in November1980, and the Labor Intensive Industry and Second Fruit and Vegetable Projectsin March 1981. Other loans being presented this fiscal year are for stateindustrial enterprise finance and a second structural adjustment loan.Projects being processed for later consideration include: sewerage disposalin Istanbul, rural development, seed production, promotion of export orientedindustries, and paper and cement modernization.

31. The Bank Group's share of the estimated total external debt(including short-term obligations) was 8.0 percent in 1979, and is expected togrow to 10.0 percent by 1981 and 12.5 percent by 1985. Its share of servicepayments is projected to fall slightly from 8.8 percent in 1979 to 6.4 percentin 1981, thereafter increasing to 7.6 percent by 1985.

32. IFC has invested in synthetic yarns, pulp and paper, glass, aluminum,iron and steel products, motor bicycle engines, piston rings and cylinderliners, and tourism. It has also invested in the Turkish Industrial Develop-ment Bank (Turkiye Sinai Kalkinma Bankasi--TSKB). As of March 31, 1981, grossIFC commitments totalled about $212 million, of which $91 million were stillheld by IFC. New investment opportunities are being pursued.

PART III - THE FERTILIZER SUBSECTOR AND THE BENEFICIARIES

Introduction

33. The fertilizer industry underpins Turkey's agricultural sector, whichin turn, is a major source of employment and foreign exchange earnings.Starting from modest beginnings as a byproduct to steel production in 1939,the industry now includes 10 public, private, and mixed sector companies with18 plants, 6 of them built in the last five years. The installed capacity ofthe industry is about five million product tons, equivalent to about onemillion nutrient tons of nitrogen and 845,000 nutrient tons of phosphatefertilizers. For reasons noted in para. 36, capacity utilization has beenpoor in recent years (around 30-40 percent) and domestic production does notmeet demand, a cause for serious concern since fertilizer imports aresubstantial (an estimated $450 million in 1980, was for finished products and

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$230 million for inputs). Since the import cost of inputs is about 40-60percent of the import cost of the finished product, increased and moreefficient use of installed capacity is of high priority.

34. Fertilizer is produced in Turkey from a wide variety of inputsranging from import-based petroleum feedstocks to domestic lignite; Turkey hassubstantial lignite reserves and two of the world's limited number oflignite-based fertilizer plants. Turkey also has large deposits of pyrites(iron sulphite) suitable for the production of sulphuric acid, a keyintermediate, much of which is still imported. Extensive deposits ofphosphate rock are known to exist but are of low quality and in difficultlocations. Hence, except for lignite and pyrites, Turkey does not possesssubstantial proven raw material resources for fertilizer production and mostof the basic inputs (oil for naptha and fueloil feedstocks, rock phosphate,and sulphur) and some intermediates (ammonia, sulphuric acid and phosphoricacid) are imported. Altogether, Turkey depends on imported materials directlyor indirectly for 80 percent of its fertilizer needs.

35. In the long-term, prospects are good for Turkey to maximize the useof local materials such as lignite, pyrites and possibly natural gas in theproduction of fertilizer. In the medium-term, besides increasing productionand productivity, lower energy consumption per unit of production can beobtained from existing capacity by the substitution of locally available lowercost feedstocks such as refinery gas for high-value naptha. Considerableforeign exchange can also be saved by increased production of intermediatessuch as sulphuric acid based on domestic pyrites or imported sulphur. Becauseof the changed economics of fertilizer production, availability of alternativefeedstocks and improvements in the technology for using lignite, expansionplans for the next few years are focused on developing a third lignite-basedplant and a plant based on gas resources in Thrace which might prove suitablefor fertilizer production.

36. Production improved in 1980 and reached an estimated 460,000 nutrienttons of nitrogen and 352,000 nutrient tons of phosphatic fertilizers, about 50percent of capacity. The deficit in 1980, about 145,000 tons of nitrogen andabout 94,000 tons of phosphatic nutrients, was covered by imports. Lowcapacity utilization is due to several factors including; structural andtechnical bottlenecks arising from poor maintenance, inadequate spare parts,or design deficiencies; poor and uneven quality and unreliable supply of localraw materials (lignite, pyrites, rock phosphate etc.); weak organization andmanagement; lack of trained manpower, working capital diffiuulties; inadequateforeign exchange for raw material inputs and spare parts; power shortages; andinadequate water supply. Steps to correct some of these probl-ms have alreadybeen taken. The Government is giving priority in the allocation of foreignexchange to fertilizer inputs rather than finished product imports, and aconsiderable proportion of these imports of inputs are being financed out ofthe structural adjustment loans. Some of the other major Droblems wiil beaddressed directly by the proposed project.

The Market and Marketing

37. Agriculture is an important sector, accounting for about 60 percenrof export earnings, of particular significance in the current balance of

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payments crisis. While the performance of agriculture has been reasonablygood by international standards, and Turkey is self-sufficient in food, thereis scope for increasing the area under cultivation and the use of moreintensive methods, such as fertilizers. Fertilizer consumption, almostnonexistent in the early 1960's, has increased dramatically (by 15 percent perannum since 1972) and reached 780,000 nutrient tons of nitrogen and 660,000nutirient tons of phosphate nutrients in 1979. It declined in 1980, inresponse to substantial price increases. Although the increases in use havebeen significant, it is still low, about 47 kg/ha of arable land in 1977. TheBank projects consumption to resume an upward trend in 1981, increasethereafter at about 6.5 percent per annum and by 1987 reach about 1.2 millionnutrient tons of nitrogen and 0.9 million nutrient tons of phosphaticfertilizers. The projections assume retail prices rise to world levels butthat the ratio of fertilizer prices to crop prices will continue to befavorable. Assuming restoration of reasonable capacity utilization levels,domestic production should reach about 842,000 tpy of nitrogen and 716,000 tpyof phosphlate nutrients by 1987, still significantly below demand.

38. Fertilizer distribution used to involve a number of public andprivate firms. However, to ensure an orderly and broad distribution offertilizers during a period of foreign exchange shortages, DONATIM, the StateEconomic Enterprise (SEE) responsible for supplying inputs to farmers, wasmade responsible for distribution. A small amount, less than 10 percent, isdistributed by the Turkish Sugar Company (SEKER). These two SEEs are also theonly authorized fertilizer importers. Fertilizers account for a substantialproportion (as much as 50 percent) of DONATIM's sales and it has done areasonable job in the physical distribution of fertilizers through its networkof outlets throughout the country. A fertilizer marketing study focusing onthe introduction of urea was undertaken in the early 1970s, in connection withthe Bank-financed IGSAS Project (Ln. 845-TU of June 1972), and resulted inimprovements to the system. However, with the increased consumption offertilizers, there is a need to update this study and examine whether thepresent dealer network, warehousing system and transport network are adequatefor the increasing volume of fertilizers, as well as whether, in line with theGovernment's market oriented policies, producers should be allowed todistribute part or all of their products directly. The proposed projecttherefore includes a marketing and pricing study. Assurances were obtainedthat the marketing and pricing study will be carried out before December 31,1982 under agreed terms of reference. Consultants, acceptable to the Bank, tocarry out the study will be employed by October 31, 1981. The Government hasa4so agreed that after an exchange of views with the Bank, changes, based onthe study's recommendations, will be implemented by June 30, 1984 (LoanAgreemeDt, Section 3.01).

lcsrtal~"i iZ( ic ing

i9. W-dtt, ex-factory and retail fertilizer prices are controlled by theGovernmuit. Yoth were substantially increased in 1980; retail prices by overf-ive tiiUwf (ice. to $i)60/ton for urea), and ex-factory prices by about fourtimes (i e. to about 4330/ton for urea). Despite this, retail prices are5t1l1 -bovli ou(h iiholf world market levels. The subsidies are partly financed

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by the agriculture sector through a Price Stabilization Fund which derives its

resources from a levy on the margin betwen the price received by exporters and

the price paid to farmers. These arrangements are relatively new and it is

not yet clear that the Fund is a reliable source of funds for the fertilizer

producers. During 1980, all fertilizer producers experienced substantial

accounts receivable problems, which impeded their ability to produce. The

Government has recently taken steps to rectify this situation, including

providing additional funds to DONATIM and SEKER. Receivables for all three

beneficiary companies had been reduced to acceptable levels by March 1981.

Nevertheless, an assurance was obtained that satisfactory arrangements will be

made by government to ensure payments by DONATIM and SEKER for fertilizers

purchased from local producers are made within four months of date of delivery

(Loan Agreement, Section 3.05). In connection with the proposed Second

Structural Adjustment Loan, the Government has indicated its intent to phase

out subsidies on fertilizers within the next five years. The marketing and

pricing study will facilitate this change by examining such issues as the

impact on farmers' incentives of deregulation, problems of the present

financing arrangements, etc.

40. Under a new system established in January 1980, ex-factory

fertilizer prices are established every six months by a formula based upon the

average cif dollar price of comparable products imported by DONATIM. The

formula is designed to provide an incentive for local fertilizer producers to

increase domestic value-added since those with higher value-added receive a

higher TL price. By providing an international reference point, it also

encourages more economic investment decisions by producers and facilitates the

planned transition to a market price system. Under the formula, ex-factory

prices are equivalent to a range from $246/ton to $332/ton, depending on the

product, or 8-17 percent above cif prices, which are currently below projected

long-term equilibrium levels. Most producers are now profitable and

generating sufficient cash for their operations.

The Beneficiary Companies

41. Azot Sanayii. Azot, an SEE formed in 1954, is the major government

fertilizer company and the largest fertilizer company in Turkey, accounting

for 34 percent of the nitrogen and 30 percent of the phosphate capacity. It

operates six plants, including the two lignite-based plants at Kutahya. Like

other SEEs, Azot is under the direction of a permanent five-man board

including its General Manager, a capable and experienced administrator.

Despite a conscientious and relatively efficient management and staff, Azot

faces many of the general problems of the SEEs: inadequate management and

professional compensation and incentives, overcentralization, overstaffing and

inadequate financial management systems.

42. While some of the general SEE problems are being addressed by the

Government's ongoing efforts on SEE reform, implementation of these decisions

will require adjustments within the company. In addition, Azot's management

wishes to address a number of management issues: production and process

planning; maintenance planning; inventory control and management;

organizational structure; incentives; standard costing; energy management;

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financial management including management information systems, capitalbudgeting and financial planning; and training. The project providesconsultants to help Azot do this. Assurances were obtained that theconsultants will be engaged by no later than December 31, 1981, that an actionprogram will be prepared by December 31, 1982, and that the program will beimplemented after consultation with the Bank by December 31, 1983 (AzotProject Agreement, Sections 2.03 and 2.04). In addition, an assurance wasobtained that the Government will take all measures necessary and within itspowers to enable Azot to implement this program and grant Azot sufficientautonomy to carry out its operations (Loan Agreement, Section 3.04). Toincrease operational flexibility, an informal understanding was also obtainedthat Azot's Board will delegate greater authority over personnel, minorinvestment, and purchasing to its General Manager and staff. To helpstimulate more efficient SEE operations and provide a clearer measure ofperformance, the Government has agreed, that a control and monitoring systemwill be established in coordination with Azot by December 31, 1981, to reviewAzot's performance against efficiency criteria and monthly production targets,including unit costs (Loan Agreement, Section 3.03).

43. Azot's installed capacity, including the new Gemlik plant (stillbeing run in), is 1.7 million product tons per year (300,000 nutrient tons ofnitrogen, and 240,000 nutrient tons of phosphate). Except for the small 50,000tpy Kutahya I lignite-based plant operating above designed capacity, all itsplants are operating at low capacity utilization rates. Total production in1980 was 531,000 product tons or 34 percent of capacity. Three of the plants,the 340,000 tpy Kutahya II lignite-based nitrogen plant, the 220,000 tpytriple superphosphate (TSP) plant and the 230,000 tpy di-ammonium (DAP)phosphate complex (both at Samsun), show the most promising opportunities forrationalization and increased production, and are included in the proposedproject.

44. The Kutahya II plant is of great interest to Turkey because of itsuse of domestic lignite as a raw material and fuel. This plant, commissionedin 1968, uses the Koppers-Totzek process for gasification of lignite from thenearby Turkish Coal Authority (TKI) mine at Seyitomer. It has never reachedits design capacity and has suffered from its inception from uneven quality inthe lignite supplied (consistency, not quality, being essential in fertilizerproduction). Poor operation and maintenance practices at the plant, and powerfailures have also caused problems. A debottlenecking plan was prepared bythe plant's original engineering firm, Krupp-Koppers from Germany, and issupported by the project. The Samsun complex includes, besides the finishedproduct facilities, a 214,000 tpy sulphuric acid plant using pyrites from alocal copper smelter (the smelter is expected to be modernized under theproposed State Industrial Finance Project also scheduled for Boardconsideration in FY81), a 72,000 tpy and a 109,000 tpy phosphoric acidplants. Inadequate water supply, poor quality, insufficient and wet pyritesand inadequate handling facilities are the major bottlenecks which the projectwill address.

45. In addition to the rehabilitation of the Kutahya and Samsun plants,which are included in the project, Azot is completing a naptha based 330,000tpy ammonia plant as part of the Gemlik plant, financed by bilateral credits.

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At the suggestion of the Bank, Azot is re-examining the economic justificationof completing the investment in view of higher naptha prices as well as thefeasibility of converting this plant to an alternative feedstock. In anycase, because of sunk costs and tied credits, the additional investment tocomplete this facility is likely to be justified, even if based on naptha.

46. Azot's financial results have been mixed. From 1977 to 1979 itshowed substantial losses, partly due to low capacity utilization and partlyto low ex-factory prices. However, during 1980, due to increases inex-factory prices, the company showed a substantial profit, an estimated TL1.9 billion ($21 million) after taxes, reflecting the profitability under theprice formula of domestic based lignite fertilizer production. During 1980,Azot's equity base, which had significantly eroded, was also restored by theprofits and an additional TL 5.1 billion ($56 million) increase in equity fromthe Government. As a result, the debt/equity ratio improved from 98;2 to50:50 and the current ratio to 1.7;1.

47. Istanbul Gubre Sanayii. IGSAS, established in March 1971 under theCommercial Code, is a wholely owned subsidiary of the Turkish PetroleumCorporation (TPAO) and IPRAS, a fully owned subsidiary of TPAO. IGSASoperates a Bank-financed 511,500 tpy urea plant, including a 330,000 tpyammonia unit, on the Marmara coast utilizing naptha from the adjacent IPRASrefinery (Lns. 845 and 845-2-TU). Commissioned at the end of 1977, after somemechanical problems during start-up, production from the plant has increasedgradually, reaching in 1980 a total of 265,000 tons of ammonia and 430,000tons of urea, or 84 percent of capacity, one of the highest rates in thecountry . The company is well managed with a competent and efficient staffreflecting in part the relative flexibility allowed under the privatestatutes. IGSAS has, nevertheless, been subject to some politicalinterference in its activities and its general manager was changed twiceduring the last three years. The current General Manager and senior staff areexperienced and competent. Nevertheless, assurances were obtained thatqualified management and staff will be retained (IGSAS Project Agreement,Section 3.01).

48. The company first became profitable in 1979 and, under the newex-factory price regime and relatively high level of capacity utilization,realized TL 2.8 billion ($31 million) of profits after taxes in 1980. Thegeneral financial situation as a result is satisfactory with a current ratioof 1.3:1 and a debt/equity ratio of 45:55.

49. Although production is satisfactory, the economics of fertilizerproduction have been adversely affected by the sharp increases in naphthaprices, i.e. from $20/ton at project appraisal in 1971 to $350/ton atpresent. Substantial savings can be realized by converting the plant to useplatformer gas from the adjacent IPRAS refinery as feedstock and excessrefinery gas, otherwise flared, as fuel.

50. Gubre Fabrikalari. Gubre is a joint sector company established in1953. Its ownership is divided among; three SEEs, including Azot, holding 34percent of the shares; agricultural cooperatives and insurance companies with

35 percent of the shares; and private shareholders holding 31 percent. It

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operates two 200,000 tpy triple superphosphate plants, one at Yarimca and the

other at Sariseki, and a 200,000 tpy complex fertilizer plant also atYarimca. Production at these plants in recent years has been reasonably

good--385,000 product tons in 1980, about 64 percent of capacity.Nevertheless, substantial improvement can be obtained through

rationalization. Moreover, the plants presently depend on the importation of

sulphuric acid, uneconomic because of high transport costs. The addition of a

new sulphuric acid plant would reduce production costs, balance the production

system and also reduce energy needs. Gubre has shown a profit over the last

four years and earned about TL 580 million ($6 million) in 1980, after taxes.

The company has a very sound debt/equity ratio of 33:67 and a current ratio of

1.1:1 which while low, is acceptable.

Bank Assistance in the Sector

51. The Bank has financed one fertilizer project in Turkey, the IGSAS

Ammonia/Urea Project (Ln. 845-TU of June 1972, and Ln. 845-2-TU of April

1975). The Bank's operations in the industrial sector have been reviewed by

the Operations Evaluation Department in its report entitled "Sector Operations

Review: Industries and DFC's Program in Turkey" (Report No. 3077 dated July

18, 1980). This report and a separate Project Performance Audit Report on the

IGSAS Project (Report No. 3037 dated June 17, 1980), noted that the IGSASproject had faced a number of financial, managerial and technical problems,

particularly during start up including frequent management changes and

difficulty in maintaining adequate debt/equity and current ratios. As pointed

out in the section on the company, these problems have been resolved. The

IGSAS report also noted the contribution of the project to Turkey's

agricultural development and remarked on the high level of competence ofmiddle-level technical and managerial personnel in the country.

52. More generally, the sector report commented on the relative lack of

success the Bank's industrial lending had realized in stimulating greater

export orientation or less capital intensive investments and the limited

achievements in solving the major institutional problems facing the SEE

sectors. The report also highlighted the limitations on solving sectorproblems through individual projects. It concluded, however, that more recent

Bank operations have supported broader socio-economic objectives, that theBank's long and consistent association with TSKB (the Turkish Industrial

Investment Bank) resulted in a viable and effective institution, and that the

Bank Group has transferred much needed foreign exchange resources and

contributed substantially to the country's industrial development. As has

been noted above, the export and SEE reform issues are being addressed at the

policy level in the context of structural adjustment lending. In addition,

projects specifically focused on less capital intensive development and

exports have recently been approved or are under preparation. The proposed

project will indirectly support agricultural exports and directly improve

operations of Azot, the only SEE involved.

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PART IV - THE PROJECT

Project History

53. The proposed project grew out of the recognition that Turkey was notobtaining reasonable results from its existing fertilizer capacity, in partdue to foreign exchange shortages, but primarily because of technical andoperational problems. Encouraged by the Bank, the Government and the majorfertilizer producers identified and prepared a rationalization and energysaving project designed to increase capacity utilization, save energy andreduce major bottlenecks existing among selected major fertilizer producers.Seven of the eighteen plants in the country were identified as having higheconomic priority for rehabilitation. Because of status of preparation andlocal and foreign resource constraints, these were then separated into twophases. The first phase, encompassing four plants identified as having thehighest priority, is supported by the proposed project.

54. Project preparation was carried out by the sponsoring companies,coordinated by Azot and assisted by a number of specialized foreignconsultants financed by a $600,000 advance under the Bank's ProjectPreparation Facility (PPF)(P-027-TU). The project was appraised in December1980. Negotiations were held in Washington between April 1 and 3, 1981, witha delegation headed by the Chief Financial Counselor of the Turkish Embassyand representatives of the Treasury and the three beneficiary companies.

Project Objectives and Scope

55. The project's objectives are to; increase fertilizer production andproductivity in existing facilities by rationalizing them; save energy anddecrease costs through debottlenecking; increase the domestic production ofkey intermediates, especially sulphuric acid; and reduce the foreign exchangeburden of imports. Besides providing equipment and engineering services torationalize the selected plants, the project provides assistance for:training, a marketing study, and plant operations and management improvementsfor Azot. The project covers three companies, Azot, IGSAS, and Gubre, andfour plants: (a) Azot's 340,000 tpy Kutahya II lignite-based calcium ammoniumnitrate (CAN) plant; (b) Azot's 220,000 tpy triple superphosphate (TSP) and230,000 tpy di-ammonium phosphate (DAP) plant at Samsun; (c) IGSAS's 511,500tpy urea plant; and (d) Gubre Fabrikalari's 200,000 tpy TSP and 200,000 tpycomplex fertilizer plant, both at Yarimca. Details of the project areprovided below, in the Loan and Project Summary, in Annex III and in the StaffAppraisal Report (No. 3377-TU dated April 9, 1981) distributed separately tothe Executive Directors.

The project includes specifically:

(a) Kutahya II. Provision of equipment, materials and spare partsto increase production of CAN to about 290,000 tpy by: (i) improving ligniteprocessing (including mixing, grinding, and cleaning facilities); (ii)modifying and repairing badly eroded or corroded equipment and machineryincluding gasifiers, gas compressors and waste heat and steam boilers; (iii)

strengthening the utility and power supply systems; and (iv) improving the

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process and operation and control systems. Engineering services to design and

carry out the improvements and about 145 man-months of expatriate productionspecialist assistance are also included.

(b) Samsun; Provision of materials and equipment to increase

production of TSP to about 198,000 tpy and DAP to about 204,000 tpy by; (i)

modernizing the existing 214,000 tpy sulphuric acid plant, including

installation of a sulphur burner, a pyrite crushing and grinding system,blowers and economizers; (ii) modifying the phosphoric acid concentration

units and constructing two new phosphoric acid tanks; and (iii) modernizingbagging, handling and storage systems. Construction of a new fresh watersystem, including a 25 kilometer pipeline, and engineering services to design

and carry out the improvements are also included.

(c) IGSAS: Provision of equipment and spare parts to increase urea

production to about 486,000 tpy and improve energy efficiency by: (i)

modifying the existing 330,000 tpy ammonia plant to replace part of the high

cost naptha feedstock and fuel with platformer gas and refinery fuel gas from

the neighboring IPRAS refinery; (ii) replacing ammonia condensers, modifyingthe ammonia converters and installation of a new purge gas recovery system to

increase ammonia production; (iii) modifying the refrigeration system to

reduce excessive corrosion and clogging problems related to sea water cooling;

(iv) rehabilitating the urea desorption system and installing a C02

purification system to improve efficiency and safety and reduce pollution; and(v) improving utility systems and product storage, handling and shipping

systems. Engineering services to design and carry out these improvements are

also included.

(d) Yarimca: Construction and equipping a new 250,000 tpy

sulphur-based sulphuric acid plant to replace imports, including a 4.5 MVA by-

product steam generator to provide 50 percent of the power needs of the

complex. Provision of equipment and spare parts to increase production of TSP

and complex fertilizer to about 180,000 tpy each by: Ci) equipping theexisting 90,000 tpy phosphoric acid plant with a new rock grinding unit and

pumping facilities, heat exchanger, and storage tanks; (ii) installing a

mixer, and granulator and drying section, including a dedusting unit in theexisting TSP plant; (iii) improve the utility systems and the processoperation and control systems; and (iv) providing a new 500 ton gypsum bargeand additional loading facilities to improve storage and handling.

Engineering services to design and carry out the improvements are alsoincluded.

(e) Training: Provision of about 24 man-months of technical

assistance to strengthen training programs for professional and technical

staff of Azot, IGSAS and Gubre in operations, maintenance and financialmanagement. Equipment and training aids and expanding of training facilities

of Azot at Ankara, Kutahya, and Samsun, and of IGSAS at Tutunciftlik as well

as about 75 man-months of overseas training for selected staff.

(f) Management Improvement Component: Provision of 260 man-months

of technical expertise to undertake a comprehensive study of the management

and organization of Azot and prepare and implement operations, organization

and financial management improvement program including steps to increaseefficiency through increased delegation of authority (para. 42).

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(g) Fertilizer Marketing and Pricing Study: Provision of about 30man-months of technical assistance to help the Government undertake a study ofthe fertilizer marketing, transport, storage and distribution system, and itspricing.

In total about 1,500 man-months of technical assistance are provided, at acost of $13,000 per man-month, inclusive of salaries, travel and subsistence.The largest part, 990 man-months, are for the engineering services needed todesign and implement the improvements and the remainder, as noted above, arefor plant operations, training, management assistance, and study programsunder the project. A list of the major items of equipment under the projectwas agreed during negotiations.

Project Costs and Financing

56. The total cost of the proposed project (including an average 27percent price, and 10 percent physical contingency on base cost but excludinginterest and other charges during construction), is estimated at about $203million. International escalation rates have been used for local costs, aswell as for foreign costs, on the assumption that differences between localand international inflation will result in corresponding exchange rateadjustments. The estimated foreign exchange cost is $103 million excludinginterest and other charges during construction. However, if these areincluded, then the total financial requirements would be about $237 million,and the foreign exchange resources $131 million. The cost estimates assumesufficient power for the Kutahya II plant will be provided at a modest cost bya direct line from the Seyitomer Power Plant (Loan Agreement, Section 3.08).However, the Turkish Electric Authority (TEK) has recently questioned whetherthis solution would be sufficient to avoid fluctuation in power supply.Assurances have therefore been obtained that Azot will carry out a studyworking with TEK to develop a plan of action by September 30, 1981 for meetingthe power requirements of the plant (Azot Project Agreement, Section 2.10).Because of its importance, the completion of satisfactory arrangements forfinancing and constructing the needed power facilities is a condition ofdisbursement for the equipment for the Kutahya II component (Loan Agreement,Schedule 1, Para. 4(c)).

57. The proposed Bank loan of $110 million will finance 84 percent of theforeign exchange requirements and 46 percent of the total financingrequirements. This includes about $7 million of interest during constructionfor Azot, justified by the cash flow needs of the company. In the event thatadditional foreign funds are required to ensure adequate power for the KutahyaII plant, based on the study mentioned above, the allocation to interestduring construction could be reduced. The remaining foreign exchangerequirements for working capital and financial charges during construction,i.e. $21 million, will be met as follows; IGSAS $5.3 million, Gubre $6.7million, and the Government $9 million.

58. The $105.6 million equivalent required for local costs, includingfinancial charges in TLs during construction, and the local component ofworking capital will be financed as follows: about $39.0 million equivalent

will be provided by Azot; about $9.7 million equivalent will be provided by

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IGSAS; and about $25.9 million will be provided by Gubre; all from internalcash generation. The remaining local currency requirements, $31.0 millionequivalent, required for Azot, will be provided or arranged by theGovernment. The total Government contribution, including foreign exchangerequirements, is expected to be about $40.0 million equivalent, part in equityin order to maintain Azot's debt/equity ratio at 60:40, on revalued assets.Agreement was obtained that the Government will provide, or cause to beprovided funds, on appropriate terms, and will ensure funds are available incase there is a shortfall in any of the components (Loan Agreement, Section3.01). Agreement was also obtained from the companies, that they will notundertake nonproject investments costing more than $7 million per year forAzot and $5 million per year for IGSAS and Gubre (Project Agreements, Section4.06). An understanding was reached that Azot's Gemlik expansion, referred toin para. 45, is exempted from this limit, subject to confirmation of itsjustification and to financial arrangements being made for completing it whichdo not impair Azot's ability to carry out the proposed project.

59. The Bank loan will be to the Government for 17 years including 4years of grace. It will be onlent to the beneficiaries at 10.6 percent p.a.for 12 years including 4 years of grace. The beneficiaries will bear theforeign exchange risk. Inflation was 50 percent in 1978, 65 percent in 1979,and 105 percent in 1980. Because of uncertainties associated with changes ineconomic structure expected in response to Government policy initiatives, itis difficult to forecast the rate of inflation. It is tentatively projectedto decline to 60 percent in 1981, 40 percent in 1982 and 30 percent in 1983,if government policies are effectively implemented. Interest rates ofdomestic lending institutions for foreign currency lending, which are adjustedevery six months, range from 11.5 to 16.6 percent inclusive of taxes, chargesand rebates extended to foster inter alia exports and regional development,and borrowers also bear the foreign exchange risk. Under current policies,exchange rate adjustments are expected to offset the inflation differentialbetween Turkey and its major trading partners.

Project Execution

60. Each company will be responsible for implementing the components inits plants and project teams have been formed for this purpose. The projectteams in IGSAS and Gubre will supervise the activities of the engineeringconsultants and subcontractors and with their assistance, handle procurementof equipment and materials. Because of the limited inhouse expertise in Azot,as a condition of disbursement for the equipment for the Kutahya II and Samsuncomponents, services of at least 4 specialists to supplement Azot's staff willbe hired under terms and conditions acceptable to the Bank (Loan Agreement,Schedule 1, para. 4(b)). In addition, Azot has agreed to develop a staffingplan by March 31, 1982 and implement it by June 30, 1982 (Azot ProjectAgreement, Section 3.01). Because of specialized technology and licensingagreements, the firms which built the plants, and prepared the rehabilitationprograms, will also be the lead firms for rehabilitation. The firms are KruppKoppers from Germany for Kutahya II; Uhde from Germany for IGSAS; and DavyInternational from Germany for Samsun and Yarimca. All are technicallycompetent.

61. Overall project coordination will be the responsibility of the

coordination unit in Azot, which was established to prepare the project. This

- 21 -

group will supervise the training activities and the management improvementcomponent. The fertilizer marketing and pricing study will be carried outunder the direction of a steering committee with representatives from theState Planning Organization (SPO), the Ministry of Agriculture, the fertilizerindustry, the fertilizer marketing organizations (DONATIM and SEKER), and theAgriculture Bank. Because of the importance of reliable local raw materialsupply, a fertilizer industry working group with representatives of theproducers and raw material suppliers, and SPO, will be established to reviewand formulate plans for ensuring smooth production (Loan Agreement, Sections3.01(a) and 3.07). The foreign exchange requirements for operations willincrease after rehabilitation. The Government has agreed to make availablethe amounts of foreign exchange needed for fertilizer inputs and spare partsneeded to ensure efficient operation of the companies' plants, and to ensureprompt licensing of such imports (Loan Agreement, Section 3.06).

62. Existing environmental standards for industrial effluents in Turkey,are generally less stringent than current Bank guidelines. Thus, agreementwas obtained that the company's plants will meet acceptable environmentalguidelines for fertilizer plants (Project Agreements, Sections 3.01(f) or(g)). Because of its location in a built-up area, the new sulphuric acidplant at Yarimca will use a technology designed to minimize particulateemissions.

Procurement and Disbursement

63. Machinery and equipment totalling about $69 million will be procuredunder international competitive bidding in accordance with Bank guidelines.Proprietary items procured on a negotiated basis, and time or process criticalequipment and spares, procured under limited international tendering, will bepermitted up to a total of $24.5 million, which is justified by the rehabili-tation requirements. Small items costing $100,000 or less, totalling about $3million, will also be procured under limited international tendering. Allsuch items will be on the basis of a list of goods satisfactory to the Bank(Project Agreements, Schedule 1, para. Cl and 2). Domestic manufacturers willbe allowed a preferential margin under international competitive bidding of 15percent or the actual customs duty, whichever is lower. The qualifications,experience, terms and conditions of employment and selection of theengineering consultants for the new sulphuric acid plant for Yarimca and thenew purge gas recovery unit at IGSAS will be satisfactory to the Bank.Because of the urgency of commencing rehabilitation, retroactive financing isproposed for up to $4 million for downpayments to engineering firms andequipment suppliers for contracts awarded in accordance with Bank guidelinesentered into after January 1, 1981 (Loan Agreement, Schedule 1, para. 4(a)).

64. The Bank loan will be disbursed as follows: 100 percent of theforeign expenditure for imported equipment and spare parts, foreignconsultants (including repayment of advances under the PPF), and training, 100percent of the ex-factory costs of contracts won by local suppliers underinternational competitive bidding (excluding local taxes), and 100 percent ofthe foreign expenditure or 60 percent of the total expenditure for themarketing consultants. Disbursements are expected to be completed byDecember 31, 1985.

- 22 -

Financial Analysis

65. Financial projections for the four plants have been prepared assumingproduction build-up will begin in 1984/85, and reach the capacity utilizationtargets as follows; (i) Kutahya II, 85 percent from 1986; (ii) Samsun, 90percent from 1986; (iii) IGSAS, 95 percent from 1985; and (iv) Yarimca, 90percent from 1986. The projections assume that without the project, KutahyaII's capacity utilization could increase to about 28 percent and Samsun's toabout 55 percent if raw material supplies improved. While current ex-factoryprices are slightly above landed cif prices for similar products, currentinternational prices are depressed below long-term trends. The Bank expectscif prices to rise in real terms over the next four years close to or abovethe current level of Turkish ex-factory prices.

66. The projections show substantially improved results may be expectedas early as 1985 as spare parts, components, and technical assistance begin toyield substantial improvements in efficiency. Total incremental sales areprojected at $243 million in 1985 rising to $310 million in 1987. Profits andinternal cash generation are also expected to be substantially improved,although the projections are sensitive to pricing policies. The estimatedincremental financial rates of returns before taxes, the estimatedimprovements in net profits after tax as a percentage of sales for the plantsand internal cash generation are shown below. Because of the importance ofinternal cash generation, and the current Government control over ex-factoryprices, assurances were obtained that so long as the Government continues toset ex-factory prices, they will be not less than cif equivalent levels (LoanAgreement, Section 3.02). The overall project financial rate of return is 49percent. A one year delay in project implementation, combined with a 10percent capital cost increase and the eventual attainment of 10 percent lesscapacity utilization will reduce the returns to 41 percent (26 percent forGubre, the worst case).

Incremental After Tax InternalFinancial Profits/Sales Cash

Rate of Return 1987 GenerationBefore Tax (%) (%) 1985 ($ million)

Azot - Kutahya II 42% 18% $24- Samsun 52% 11% $28

IGSAS 69% 15% $45Gubre 33% 14% $25

67. The current ratio of the companies is expected to be at or above1.1:1; and the debt/equity ratios below 60:40. Assurances were obtainedthat the companies will maintain a current ratio of at least 1.3:1 (1.1:1for Azot during project implementation); a debt/equity ratio of 60:40; thatthey will not encourage additional debt if by so doing the projected debtservice coverage would fall below 1.5 times; and that without Bank consent,they will not declare dividends if after such payments, the current ratiowould fall below 1.4:1 (Project Agreements, Sections 4.04, 4.05, and

- 23 -

4.07). While present accounting practices are reasonably satisfactory inIGSAS and Gubre, Azot will be provided assistance under the project tomodernize its accounting systems and practices.

Benefits and Risks

68. The incremental economic rate of return is estimated at 43percent, reflecting the high value gained by restoring capacity with modestamounts of capital investment. The subprojects show economic rates ofreturns as follows: 36 percent for Kutahya II; 35 percent for Samsun; 68percent for IGSAS; and 39 percent for Yarimca. The project returns aremost sensitive to delays. A 10 percent increase in operating costs wouldreduce the return to 39 percent. However, even under very adverseassumptions of capital costs increased by 10 percent, capacity utilization10 percent below levels assumed, and a one year delay, the rate of returnwould still be 35 percent (27 percent for Samsun, the worst case). Overallrates of return of the plants being rehabilitated using salvage values forexisting facilities, have also been calculated to ensure that the projectsupports economic production. The results are; 37 percent for Kutahya II;25 percent for Samsun; 17 percent for IGSAS; and 23 percent for Yarimca,all of which are satisfactory.

69. The main benefits of the project are increased output at lowercost and substantial energy savings. By project completion in 1987, anadditional 623,000 product tpy of fertilizers will be produced, valued at$168 million in 1980 cif prices. The net foreign exchange savings, afterdebt service and cost of inputs, is expected to be $118 million per year in1980 dollars. In addition, the production of intermediates will increaseincluding an additional 126,000 tpy of ammonia, 151,600 tpy of sulphuricacid and 98,450 tpy of phosphoric acid. At targeted capacity rates, about88,000 tpy of naphtha (worth $31 million) will be saved at IGSAS and about56,000 tpy of fueloil (worth $12 million) will be saved at Samsun, IGSAS,and Yarimca. This will be partially offset at IGSAS by a 76 millionm3/year increase in the use of platformer gas and 46 million m3/yearincrease in the use of refinery off gas, worth in total about $18 millionif valued at fuel oil equivalent prices. Thus, the net energy savings areexpected to be about $25 million/year. Moreover, since part of therefinery off gas is normally flared, this understates the real savings tothe economy.

70. The main technical risks facing the project are delays inimplementation and inadequate cost controls due to managementinefficiency. These risks have been mitigated by the involvement ofexperienced engineering firms for project design and implementation and thestrengthening of the project team of Azot with expatriate specialists.Risks also arise from the general economic situation, particularly thesevere inflation which will require frequent price adjustments to maintaincash flow and provide the substantial internally generated funds requiredfor financing and operating the projects. The Government's very tightbudget position could delay the provision of the TL funds required toAzot. The pricing and cash flow risk has been mitigated by the formula

linking ex-factory prices to international prices which over the long run

- 24 -

are expected to increase, as well as by the undertaking of the Government

to ensure adequate funds flow into the marketing organization for paymentsto the companies. The budget risk is minimized by the high priority the

Government gives to the development of fertilizer production in view of itsimpact on agriculture and the balance of payments.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

71. The draft Loan Agreement between the Republic of Turkey and theBank, the draft Project Agreements between the Bank and Azot Sanayii,between the Bank and IGSAS, and between the Bank and Gubre Fabrikalari, and

the report of the Committee provided for in Article III, Section 4(iii) ofthe Articles of Agreement are being distributed to the Executive Directorsseparately. The special features of the Loan and Project Agreements are

referred to in the text and listed in Section III of Annex III.

72. Special conditions of loan effectiveness include execution of theSubsidiary Loan Agreements between the Republic of Turkey and the three

beneficiaries (Loan Agreement, Section 6.01). Special conditions ofdisbursement include; (i) for the equipment for the Kutahya II and Samsun

components, the employment by Azot of four operational experts; and (ii)for the equipment for the Kutahya II component, the completion of adequatearrangements for power supply to the plant (Loan Agreement, Schedule 1,

Para. 4).

73. I am satisfied the proposed loan will comply with the Articles ofAgreement of the Bank.

PART VI - RECOMMENDATION

74. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

AttachmentApril 15, 1981Washington, D.C.

- 25 -

ANNEX IPage 1 of 5

TABLE 3ATURKEY - SOCIAL INDICATORS DATA SHEET

TURKEY REFetENCE CROUPS (WEICRHTD AVIBACES

LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)L'TOTAL 780. 6 MOST RECENT HIDDLE INCOME INDUSTRIALIZEDAGRICULTURAL 553.8 1960 /b 1970 /b ESTIMATE jb EUROPE COUNTPIES

GNP PER CAPITA (USS) 300.0 550. 0 1330.0 2749.5 9499. 2

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 245.0 479.0 798.0 1641.4 7021.1

POPULATION AND VITAL STATISTICSPOPULATION. MID-YEAR (MILLIONS) 27.5 35.3 43.1URBAN POPULATION (PERCENT OF TOTAL) 29.7 38.4 45.6 53.9 76.0

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS) 65.0STATIONARY POPULATION (MILLIONS) 100.0YEAR STATIONARY POPULATION IS REACHED 2075

POPULATION DENSITYPER SQ. KM. 35.0 45.0 55.0 77.2 142.8PER SQ. RM. ArRICULTURAL LAND 51.0 64.0 78.0 129.5 523.3

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 41.3 41.7 39.1 30.6 23.5

15-64 YRS. 55.2 54.0 56.4 61.1 65.1

65 YRS. AND ABOVE 3.5 4.3 4.5 8.2 11.4

POPULATION GROWTH RATE (PERCENT)TOTAL 2.8 2.5 2.5 1.6 0.7URBAN 5. 1jc 5.1 4.8 3.3 1. 3

CRUDE BIRTH RATE (PER THOUSAND) 44.0 38.0 32.0 22.8 13.8

CRUDE DEATH RATE (PER THOUSAND) 17.0 12.0 10.0 8.9 9.1GROSS REPRODUCTION RATE 2.9 2.6 2.1 1.5 0.9

FAMILY PLANNINGACCEPTORS, ANNUAL (THOUSANDS) .. 65.6 66.6USERS (PERCENT OF MARRIED WOMEN) 5. 3 8.2 38.0

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71-100) 96.0 100.0 110.0 113.1 110.8

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 110.0 110.0 115.0 125.3 131.6PROTEINS (GRAMS PER DAY) 81.0 80.0 82.0 91.0 98.0

OF WHICH ANIMAL AND PULSE 24.0 26.0 24.0 39.6 62. 1

CHILD (AGES 1-4) MORTALITY RATE 24.0 16.0 10.0 4.3 0.8

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 51.0 57.0 61.0 67.8 73.5INFANT MORTALITY RATE (PERTHOUSAND) 18

7 .0/c 153.0/d 118.0 55.9 13.2

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL * 52.0 75.0URBAN .. 51.0 70.0RURAL *- 53.D 80.0

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. ..

URBAN .. .. 19.5

RURAL .. ..

POPULATION PER PHYS ICIAN 3000. 0L 2250.0 1772.0 1030. 1 624.8POPULATION PER NURSING PERSON .. 1880.0 1403.0 929.4 218.9POPULATION PER HOSPITAL BED

TOTAL 590.O/e 490.0 506.0 289.7 121.2

URBAN 190. O/e 200.0RURAL .. 5890.0

ADMISSIONS PER HOSPITAL BED .. 20.0 20.0 17.0 17.0

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 5. 7 5.9URBAN .. ..

RURAL .. ..

AVERAGE NUMBER OF PERSONS PER ROCMTOTAL .. 2.2

URBAN 2.0 1.9RURAL .. ..

ACCESS f0 ELECTRICITY (PERCENTOf DWELLINGS)

TOTAL 29.0 40.0 57.0URBAN .. ..

RURAL 2.0 18.0

- 26 -ANNEX IPage 2 of 5

TABLE 3ATURKEY - SOCIAL INDICATORS DATA SHEET

TURKEY REFERENCE GROUPS (WEIGHTED AVT AGES- MDST RECENT ESTIMATE

MOST RECENT MIDDLE INCOME INDUSTRIALIZED1960 Lb 1970 Lb ESTIMATE fb EUROPE COUNTRIES

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 75.0 109.0 98.0 105.9 100.1MALE 90.0 124.0 106.0 109.3 102.2FIMALE 58.0 94.0 90. 0 103.0 102.3

SECONDARY: TOTAL 14.0 28.0 43.0 64.0 87. 1MALE 20.0 39.0 59.0 71. 1 84.4FEMALE 8.0 16.0 27.0 56.9 84.3

VOCATIONAL ENROL. (% OF SECONDARY) 18.0 14.0 15.0 28.8 19.0

PUPIL-TEACHER RATIOPRIMARY 46.0 38.0 34.0 29.4 21. 3SECONDARY 19.0 28.0 27.0 26.1 16.4

ADULT LITERACY RATE (PERCENT) 38.0 55. 5Lf 60.0 .. 98.9

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 2.0 4.0 11. 5 84.6 339.?RADIO RECEIVERS PER THOUSAND

POPULATION 49.0 89. 0 103.0 192.2 932.9TV RECEIVERS PER THOUSAND

POPULATION .. 1.8 43.0 118.5 354.SNEWSPAPER ("DAILY CENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 51.0 *- *- 93.0 327.4CINEMA ANNUAL ATTENDANCE PER CAPITA 1. 1 6. 7 .. 5. 7 3. 3

ILABOR FORCETOTAL LABOR FORCE (THOUSANDS' 13782.1 15829.6 18858.8

FEMALE (PERCENT) 40.2 37.2 36.0 3C.4 36.1AGRICULTURE (PERCENT) 78.5 67.7 60.0 37.0 7.6INDUSTRY (PERCENT) 10.5 12.1 14.0 29.3 38.8

PARTICIPATION RATE (PERCENT)TOTAL 50.1 44.3 42.8 40.9 44.6MALE 58.7 54.9 53.2 55.9 58.1FEMALE 41.2 33.4 32.1 26.2 31. 7

ECONCMIC DEPENDENCY RATIO 0. 9 1. 0 1. 0 1. 0 0. 8

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 33. OA 32.8/hHIGHEST 20 PERCENT OF HOUSEHOLDS 61.0]g 60. 6/h .LOWEST 20 PERCENT OF HOUSEHOLDS 4. 2g 2. 9/hLOWEST 40 PERCENT OF HOUSEHOLDS 10. 6jg 9. 4h .

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 342.0RURAL .. .. 270.0

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. ..RURAL .. .. 220.0 385.8

ESTIMATED POPULATION BELOW ABSOLUTEPOVERTY INCOME LEVEL (PERCENT)

URBAN .. ..RUkAL .. ..

Not availableNot applicable.

NOTES

/a The group averages for each indicator are population-weighted arithmetic means. Coverage of countriesamong the indicators depends on availability of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1974 and 1978.

/c 1955-60; /d 1967; /e 1962; /f six years and over; /R 1963, /h 1968.

Most recent estimate of GNP per capita is for 1979, all other data are as of April, 1980.

October, 1980

- 27-ANNEX IPage 3 Qf 5

WINZTZS 0r SQ00.A. 3U0CAIORS

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PoaclsOtot Gtrovot to 00=00) "- ob..- A-1oo Soo-h rat.. of -rko p.p.- Aolt .Iitto,= rota (pqroat) - tOOcrt. sdo1ta (ohio 00 0.04 - OOi.)1000i. f 0 1950-60. 1960-70. a0d 1970-78.a .o00oc fOt01 041 Pc.lot000 o04 19 Y-ao ova

Cr0. SBoth 1t. (000 th' ) - AaaOli000 bioth. p.o tbocoO0 of 0470poPoItottoLt1960 1970, aa 1970 dt.0.. CMnsOuT"o

Cr4 .0k50 c-o thooood - A-o.0 d-th1. P.o Ohac..d of .0d-... C.cao a. (coo tbo.--d PaOlatoO) - P::-M..aoor pO. 00popcotioo; 1960. 1970. and 1978 4.0.. Oo atios 1... ohm gtoh P.o.-; oOOd01 oo00 h.oa- -AaCr0. .rod..tL- .to-Aa0.ahoof da.Oatar. at.011 hm- I0 011000 -ba-Olo

boo .- I0. -. ptod-cti p.00d 00 h1. .. oOoo .po ot -pc f 0000- 000 otto.00 Oca0 0.100) - Alltyon. af r-La,o.. too -.40000 00. 1.011 t0-Y.o 00000 1oto 00 970, 004 1977. bo4c.ato -oor pbhlto p.r thooooad of popolctoc; AR.o104 -ab-

5s.il 010000-AcaOoa.Ono (ocod) - Asoo1 olb- of ..ccoptor. rn.droc _t. o00000. 004 00I 00 h. Y- t att9.tootI of .040. -0';At btrt-= -tot4.00.- .aa ... 00a o.. 00t0.l. mOO p10.00 p,fos. A0 oofat d'ta tf- -.0t Y-000 000 ho oorhl 01- flat

Ps1r00.0 oo 0000of _oot v..f - a0050Of arotad co000ahtbd10.t.

Of Obild-b-.oro oa. (15-44 yoco.) A.1.-0 blrOh-.otoolI4001... 00 TV Sc-1.... (00- th-.aoc ooocl.ttc) - TV a.0r to- b.04."- 00011arta o 0 O..ot 000. B.0001 pobll, p. tkoo.-d popoloto.; 0010.. -Iit.aaod TV cOaa

700 0 ANDUlITION to 0000.. Rod I. Y.o;. cha- oat.000000 Of TV ao. v .at af-t0.I04dt of Ioo P0400.. ra C.00t0 (1969-71-100) - 00.d0 of p-.o 00000 -ooI 00t0. of""'a,oo soat....a' ofta 00p.t40lp

p004,000 of.1f idto ti... frod-toOc 1.000.. 0.04d .0d f.. Rodtto .0000 prto-ily to .-- odi.& S-.000 .I It t* .ooA-idoa0:. a olo ya- b.ao.. Cosd00t000000 Pti-ao .004. (ot9. OOINOOOO tob oO f0 p.o t t fc"0000 0

00.4of aooor) hkrh -o odibla and cto -ort-0 (0.5. -otf.. .o COos. AooolAtt-nOaO Co Iat,o 000f.0-t00 0 h .0ta . .0 100d) . Ah-.t.tt p-od-tiro Of ... h cootry 0. baad 0000..soddon A-70,-I14. t.00 0dOv-toa.

ti0o00 --000. 700d0c P0i00 -i0b-; 191.1-65. 1970. .04 097 400.Zad tkt lo1 000..I h - . t-

par dOy Sa-11obl. apla ro00 do-..tOrroooon aor Ta -100 b.1.0 V.o- (tO .... d.) - Oo- -.OalO .000. rcro-. Ot.daxporot. ho,,,,,ja I0 to0. 900 appOa., 00004. 00d 0 :.4 04, aodfrc 04o.roa o 004o koct..*ooO,c

9c50000. Oac to ood ootocto. 0040.O dtaotbotoo.0.9000- rfOoOOoo ooor-o.. oooo.a.oo -btal.; 1960. 1970 0.00~0~vao aO.a.dby 740 b... d -n phy.tioOOool dc04 000 -oo 0000- 0970 4000.

007"0'Y 011 -1L.d-iohnoos.ntltsP.-oOt. body ocishta. 050 lntlc(aroat - Y-I.0 lobor torso... p.rotalos of tota1l tboo tot.0400dtaoboOtio of pop01t00. and 0110000 10 p--tco too 0-000At o

toto.0000) - Lobor tEoo I0 ftaratot ... t "oao. h-tOaS -

1.0.0004 0d.00:1;I1900-OS 0970, 'Id 0977., t00. fiabtog - p..rtgao. of t0000 taboo fso; 0900 0070 "' 0070 data.P.r t.000 lm of 000.0 t.(so... ocr 4) - 000.00 --oao of P.OapOOIf ot.o(00.) - abofr 00.0.OtstOOOt, mOOO

Oat *opply Of food pa- doy. N.t aoPply Of food .4000 I a ahi y.. 0.- d..t. cloo -tro Ly .0 f... L0.0 p.i00a0a of001l ot. 9090i-0at. too cli_rtotot. r..bliabhd by USDA p-ovd. foraI. R90od 07 dot.r da.A Otw b. 190

01.0c.o 00sn,o 00 P otaio P00 day .04 20 Bra.. Of acoo 00d OartisotiaO Rto. (-_cot) total. .010. Rod tmalc - PottOOl0polo. pr-t.s., oJ 01hithf10 sos. h.b d ba aota1 p-t0.00. Th... ota0 d ot.it 000 -:oc Ato O.M. .. to otl. . 0.. cad tf-1 0.0 IRA rof0..

orda 00lov-,o. o1toa.of75 Sma of 000.0 0000 i0 3is. od:Tf p.-taOOOo of00.1. -1l Rod ft 1..l popalotO of .10.40. t.ayrOOYly;i..01 s000 . 0000 too 01.0 ooo4d tp-otp.d by 001 .to h Tird 1900 90 9540.T.. o 10 .top00 oarfoo.

00014 Yood 5oooa; 0900-05 1970 004 1977 data..17.W17dt.T... LO .tipt- tRtaftP..000000.001 fO.ota o o.-ooao.ro t ~ 00a -t-c ofa th 0. popollioto, .d4 000g 000 t-d. A fs 0t01

0000 fod a, .tt.O.. .dPl..O500p. 4.; 91.0I- 5, 1970 .0d 1977 4000. t.oooaj Dsoond-yc 0.00. - Rotic Of pp.ol.ttoo 0040 05 at0) 654 otdChIld (a. 0-_) 0000 t10 000. (co Obo..d) -Aoo 46.1.th p.O tho-od I0 to 01.0 00001 lohoo too...

OEO 300-0 1-4 t00. 0ohildos I. hiO. g. oop for ata d .. alpiat 0000000. dat.d4.-d0 to. 100. tabOo.; 1960. 0970 tot 0977 4000. INCOME DISTRIBUTION

BULTI ~~~~~~~~~~~~~~~~~~~Pca.-RAt. or ' 0000 100.0 (b.0h0I. ..tok.0h 004 Aod by . ot-thLI!, R, - tj1'1'10t1 lit. -i.i.8 .~~~~~5fp.-"ootic000. 20 p.00.0t, poo-ot 20 pt.00.0 0.4 p--.tO 40 p.rcs.

tfaOooaooa 00.(oar.) - hors ...oo ycoo 00 .. 008 o bo h.1odo.

Oftao 00000100, 000. (Z0 thooa:d1) - 0A000 40.0.th0 f acft. -04. 0~OY..r PoRTT TARGET GROUPSAfta, poo- B II-0 00 bOrObo OtiOaatd Ab010 7000 Lo .Lo)(0 0 ot SIo.fs s.d -I00-Aco:a, 0St ftr(.oo fcolOo. -001 oa.04rrl-0 .1010 poyat. torn.y Oao.1 .0. on oa .. kcc

to oo'00) 000 rko 0 oo) 0hrsoki r.00 .f0000011!hqoa400p .

0010.-od00000..0 0vo tr.spi (or _da 0000 Of f 0ti_ coar or.l tboraoo b -IocctsOrt0 tfOrdot

parrooooca o 00.0 r..pooOoo 00010000.. 0 00 sb.. o... opbtc 0.t0 itlotor00,0 pioo .1.a . attr fmos .rop

Acca Ato h. tocat Oaoaatoo-tcfcoltt.to1 oo 0p.... t - f hAir ..p.( ptotalP. .01.00-. co .rl o.obyso o

I.cl.0 000 dp . ollt to 1- .4 th..ol 201000-t 001-0p- -00000000. th 000-00 .%soyt 004 iP0d-i00f O tpcrn.oof .. so.00.0 040a00vo.ob t i.f1.00 a-yaths.a crf-01..-...l OfN00I.010

..0.. obl. .. .od .toldo topOly t. on.

- 28 -

ANNEX IPage 4 of 5

ECONOMIC INDICATORS

PopulatLon: 44.2 million (mid-1979)GNP Per Capita: US$1330 (1979)

Amount Average Annual Increase (t) Share of GDP at Market Prices (x)(million us$ (at constant 1978 prices) (at current prices)

Inaccator at current prices)1979 1965-70 1970-75 1975-80 1980-85 1965 1970 1975 1980 Ia

NATIONAL ACCOUNTS

Gross domestic product lb 58,647 6.6 7.5 3.4 4.2 100.0 100.0 100.0 100.0Agriculture 12,766 3.1 4.4 2.9 3.8 30.7 26.4 26.2 24.7Industry /c 13,310 9.5 9.5 4.5 5.2 16.6 17.2 18.0 2b.5bervLces 28,808 8.2 8.0 4.0 4.0 42.9 46.5 46.0 47.3

Consumption 47,907 5.8 7.0 3.2 3.6 84.6 82.8 84.8 82.0Gross investment 13,140 11.7 12.9 -0.2 4.2 16.7 20.1 23.7 21.2Exports of goods and NFs 2,977 7.9 7.3 1.5 10.7 6.1 5.8 6.1 5.4Imports of goods and NFb 5,378 11.2 13.8 -6.6 3.7 7.4 8.7 14.5 8.8

Gross national savings - 11,938 11.6 -11.2 2.1 4.7 15.8 18.8 18.4 18.5

Average Annual Increase (t) Composition of Merchandise Trade (t)(at constant 1978 prices) (at current prices)1972-75 1976-79 1965 1970 1975 1980 /e

MEhChANDISE ThADE

Merchandise exports 2,261 -1.0 -1.5 100.0 100.0 100.0 100.0Primary /d 1,476 -5.0 -3.6 80.0 83.0 64.1 61.7Manutactures 785 8.3 2.9 20.0 17.0 35.9 38.3

Merchandise imports 5,069 10.6 -14.6 100.0 100.0 100.0 100.0Food 114 46.0 -35.0 6.0 9.3 8.3 2.6Petroleum 1,759 9.2 -1.8 10.0 7.0 17.0 47.8Machinery & equipment 1/ 1,502 8.0 -23.8 39.9 39.8 38.5 21.1Other 1,694 9.1 -12.4 44.1 43.9 36.2 28.6

1975 1976 1977 1978 1979 1980 /e

pklCE. AND TEaMb OF TRADE

GDP deflator 50.0 58.6 73.1 100.0 160.0 320.0

Exchange rate 14.4 16.1 18.0 24.3 36.4 76.4

Export price index 84.0 87.4 95.6 100.0 105.6 128.1Import price index 84.2 87.6 96.0 100.0 125.6 165.2

Terms of trade index 99.7 99.8 99.6 100.0 84.1 77.5

As t of GDP

(at current prices)1965 1970 1975 1980 Ie

PUbLIC FINANCE

Current revenue 15.0 22.6 22.0 20.1

Current expenditure 10.0 11.8 12.6 11.8burplus (-) or deficit (-) -2.0 -2.3 -0.4 -5.1Investment expenditure 4.7 5.7 4.2 4.2

Transfers 5.0 7.5 5.5 9.3

Foreign financing 1.8 1.6 0.3 0.2

1965-70 1970-75 1975-80 1981-85

OTHEx INDICAT0Rb

GNP growth rate (4) 6.8 7.7 3.2 3.9

GNP per capita growth rate 17) 4.1 5.0 0.7 1.4

ICOK 2.9 2.9 5.7 5.1

Marginal savings rate (t) 28.2 19.5 16.7 25.8

Import elasticity 1.7 1.8 -1.9 0.9

Is At cosatant 1978 prices.16 At market prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies.

/c Includes mining and quarrying, manufacturing, and electricity, gas, and water./d Includes agriculture and mining and quarrying.

Ia Estimate.If Includes metal products and machinery, electrical appliances, and transportation vehicles.

EM2DA

3/16/81

- 29 -

ANNEX IPage 5 of S

BAL4NCE OF PAYMENTS, EXTEItNAL CAPITAL AND DEBT

(million 01* at current prices)

PopolacioO: 44.2 million (mid-1979)GNP Per Capita: UsA1330 (1979)

Actual Projected1970 1975 1976 1977 1978 1979 1980 IT 1981 1982 1983 1984 1985

bALANCE OP PAYlENTH

N8l exports ot gouda6 s ervices 342 3067 2993 3880 1953 2442 3990 4365 4706 4858 4889 4771Eaportn of goods 6 O.toces 754 2752 2742 2556 3106 3257 3700 4332 5183 6340 7762 9511Imparts of gooda 4 sorvices 1096 5219 5735 6436 5059 5699 7690 8696 9889 11197 12651 14281

Net trausters 91 23 IS 12 - - - - - - - -Lurret account bIalac. -58 -1892 -2295 -3572 -1710 -1771 -2788 -3207 -3667 -3916 -4054 -4115

Direct private -noent-ent 92 251 163 169 147 200 175 200 220 244 273 299

P-oc-c HbLT Igros-) 271 334 720 997 1017 4321 1c 0957 2165 2585 2862 2978 3118A-ortit-io on MIsLT -146 -175 -203 -234 -336 -414 -925 -9O7 -1245 -1934 -2058 -2102Poosic M&LT (bet) 125 159 517 763 681 3907 1032 1168 1341 928 920 1016Debt elilef Asnetit-tion - - - - - - 814 533 608 811 282 -284Olcor capita: /D 27 955 1503 2074 1030 -2410 1159 1424 1682 2137 2806 3340Cboogtc cv roserves 1- c increasee -186 417 112 566 -148 74 -392 -118 -184 -203 -726 -255

Ioteroocioooc resorve. 612 1404 1292 726 874 800 1192 1310 1495 1698 1924 2180-e-srveso oethis t itports 7 3 3 1 2 2 2 2 2 2 7 2

1972 1975 1976 1977 1978 1979 1980

uttIciol grout:Grois ocsb-rsemontu of MILT leave 372 334 720 997 1017 4321 /c 1957

-o-cesso.. 1 261 100 167 193 227 596 446BOaLcor-l 139 69 81 130 192 510 389IDA 4 18 21 19 8 3 1occer oolscl ..eral 118 13 65 44 27 83 56

.o.-cooce..io.a1 111 224 553 804 790 3725 Jc 1512OteicIal -oport credits 1 47 57 47 91 202 247llith 25 91 117 146 165 277 365Ot-or soltiloteral 27 48 54 5 35 11 26Pr-vote dl 58 38 325 606 499 3235 /c 879

EXTEkNAL DEBT

Dear oo-tcadcog aed ocbcorund /I 2519 3320 3833 4752 6842 11621 12818oir ccai 2273 2980 3275 3648 5454 7212 8476

IBED 92 288 391 512 648 890 1215IDA 99 144 163 181 188 190 190Other 2082 2548 2721 2955 4618 6132 7071

Private t 0 246 340 558 1104 1388 4409 /c 4342Doot oltut..di.g -oclidiog oodisnoosed (pLblic sod private) 3541 4931 6157 7545 10355 15302 17934

DEBT bEgVICE

- 1ta daebt servico /r 224 291 368 418 532 689 112Paymnnin 161 175 203 234 336 414 598

ocerec-t 63 116 165 184 196 275 710Total oebt service as 2 sop-rts of Soode o NFS

* rorkers' remittaucec 11.8 8.4 9.9 11.8 13.0 13.9 12.2Tocal debt service as 2 GNP 1.3 0.8 0.9 0.9 1.0 1.2 1.3

Aver-ge icte-e-c rate ou ceo loans .() 4.4 7.3 7.2 7.6 6.9 11.2 6.1Official 4.5 6.4 7.1 7.6 6.3 4.4Private 6.8 8.7 7.8 7.6 8.2 13.7

Average matcnty of 0ev locus (years) 22.1 13.1 12.7 11.7 13.2 11.1 20.3otioc-al 26.0 16.6 13.3 14.5 15.6 23.5PriLate 11.0 5.1 10.2 8,9 7.6 7.1

BANK Gh?UP EXYPOoUE (X)

IBD D0D/totol DOD 3.7 8.7 10.2 10.8 9.5 7.7 7.5lBAD disbarc-mectu/total gross disosreeee-tn 6.7 27.2 16.3 14.6 16.2 6.4 18.71B801 debt service/total debt service 5.1 10.5 11.7 15.0 15.4 15.3 9.4IDA DOD/tortl DOD 3.9 4.3 4.3 3.8 2.7 1.6 1.3IDA di-borsements/totl coons ocsburaescoss 11 5.4 2.9 1.9 0.8 0.1IDA debt aereice/total debt service 0.4 0.b 0.6 0.5 0.4 0.4 0.4

At 2 of Debt Oatstsodiugat Eod of Most -eceot

Year (1979)

TEtkM STBOCTUhE

Maturity structore of debt outstssdiog (IIMattrities doe -thin 5 yearn 46.0

M-turities due withis 10 years 75.5

Iocotoct t-t-rcrc of debt outstaoding (%JIlterest due -ithic f-rst year 12.8

is Estimae/D Ln.lucdloan ror- and issions opto 1979, ssd for prejeotud years it i.cludes net IMF, gspfill sod private M!L. borrowing botb on * Oet basis.Jc lo ol .en $2,638 silli.o of consolidated hort-ter debt, ehich is ..w repynble over _ years./0 Iluol..s private guaranteed sed privats oun-guaranteed debt./e Dote not include stunk of ahort-term, includes debt relief.7f Tacos ac.c.ut of dent reiof doa to dect rehoeduliog, sod e.cludes iheereste cc short-tce debt.

RM.2DA4/12/81

- 30 -

ANNEX IIPage l of 9

STATUS OF BANK GROUP OPERATIONS IN TURKEY

STATEMENT OF BANK LOANS AND IDA CREDITS(As of March 31, 1981)

Loan

Number Year Borrower Purpose Bank IDA Undisbursed

Twenty-four loans and fourteen credits fully disbursed 814.5 177.4

748-TU 1971 Republic of Turkey Education 13.5 0.2844-TU 1972 Republic of Turkey Istanbul Water Supply 37.0 9.2883-TU 1973 Republic of Turkey Ceyhan Aslantas 44.0 18.0893-TU 1973 Turkish State Railway Railway Project 46.7 1.1957-TU 1974 Republic of Turkey Antalya Forestry 40.0 0.21023-TU 1974 TEK/TKI Elbistan Power 148.0 44.01024-TU 1974 DYB Industry 40.0 0.51130-TU 1975 Republic of Turkey Rural Development 75.0 39.11248-TU 1976 Agriculture Bank of

Turkey (TCZB) Agriculture Credit 54.3 31.11258-TU 1976 State Pulp and Paper

Industry (SEKA) Newsprint 70.0 8.31265-TU 1976 Republic of Turkey Livestock III 21.5 11.21194-TU 1976 TEK Power Transmission II 56.0 9.21310-TU 1976 Republic of Turkey Tourism 26.0 22.51379-TU 1977 DYB Industry 70.0 19.71430-TU 1977 TSKB Industry 74.0 9.01585-TU 1978 Republic of Turkey Northern Forestry 86.0 67.41586-TU 1978 Republic of Turkey Livestock IV 24.0 22.21606-TU 1978 Republic of Turkey Erdemir Steel Stage II 95.0 80.21741-TU 1979 Republic of Turkey Ports Rehabilitation 75.0 75.01742-TU 1979 Republic of Turkey Grain Storage 85.0 85.01748-TU 1979 TSKB Industry 60.0 53.31754-TU 1979 TSKB Private Sector Textiles 65.0 62.41755-TU 1979 SYKB Private Sector Textiles 15.0 15.0S-15-TU 1979 Republic of Turkey Ankara Air Pollution Control 6.0 5.71844-TU 1980 Republic of Turkey Karakaya Hydropower 120.0 120.01847-TU 1980 Republic of Turkey Sumerbank Cotton Textiles 83.0 81.91862-TU 1980 Republic of Turkey Livestock V 51.0 51.01915-TU 1980 Republic of Turkey Structural Adjustment

Supplement 75.0 52.91916-TU 1980 Republic of Turkey Petroleum Exploration 25.0 25.01917-TU 1980 Republic of Turkey Oil Recovery 62.0 62.01952-TU 1981 Republic of Turkey Labor Intensive Industry 40.0 40.0

Total 2597.5 /b 177.4 1205.3of which has been repaid 230.9 6.4

Total now outstanding 2326.6 171.0Amount sold 3.6

of which has been repaid 3.6 - 0 - - 0 -

Total now held by Bank and IDA /a 2326.6 171.0Total undisbursed 1205.3 0 1205.3

/a Prior to exchange adjustments./b Excludes $40 million loan for the Second Fruit and Vegetable Project approved

by the Board on March 31, 1981.

- 31 -

ANNEX IIPage 2 of 9

STATUS OF BANK GROUP OPERATIONS IN TURKEY

STATEMENT OF IFC INVESTMENTS

(as of March 31. 1981)

Fiscal Amount in US$ MillionYear Obligor Type of Business Loan Equity Total

1964 TSKB DFC - 0.92 0.921966 SIFAS I Nylon Yarn 0.90 0.47 1.371967 TSKB II DFC - 0.34 0.341969 TSKB III DFC - 0.41 0.411969 SIFAS II Nylon Yarn 1.50 0.43 1.931970 Viking I Pulp and Paper 2.50 0.62 3.121970 ACS Glass 10.00 1.58 11.581971 NASAS Aluminum 7.00 1.37 8.371971 SIFAS III Nylon Yarn 0.75 - 0.751971 Viking II Pulp and Paper - 0.05 0.051972 SIFAS IV Nylon Yarn - 0.52 0.521972 TSKB IV DFC - 0.43 0.431973 TSKB V DFC 10.00 - 10.001973 Akdeniz Tourism 0.33 0.27 0.601974 Borusan Steel Pipes 3.60 0.43 4.031974 AKSA Textiles 10.00 - 10.001975 Kartaltepe Textiles 1.30 - 1.301975 Sasa Nylon Yarn 15.00 - 15.001975 Aslan Cement 10.60 - 10.601975 DORTAS Steel 7.50 1.37 8.871975 TSKB DFC 25.00 1.23 26.231976 NASAS Aluminum 1.58 - 1.581976 TSKB DFC 25.00 - 25.001976 Asil Celik Steel 12.00 2.20 14.201977 Borusan Steel Pipes - 0.06 0.061978 DOKTAS Steel - 0.09 0.091979 Ege Mosan Engines for Mopeds 2.15 - 2.151979 ISAS Motor Vehicles & Accessories 8.62 0.68 9.301979 Asil Celik Steel - 1.80 1.801979 Trakya Cam Glass 33.17 2.25 35.421980 TSKB DFC - 1.09 1.091980 ISAS Motor Vehicles & Accessories - 0.95 0.951980 MENSA Textile and Fibers 4.00 - 4.00

Total Gross Commitments 192.50 19.56 212.06Less Cancellations, Terminations,Exchange Adjustments, Repaymentsand Sales 117.63 3.49 121.12

Total Commitments now held by IFC 74.87 16.07 90.94

Total Undisbursed .77 0.23 1.00

- 32 -

ANNEX IIPage 3 of 9

C. PROJECTS IN EXECUTION 1/

Ln. No. 844 Istanbul Water Supply Project; US$37 million loan of June 30,1972. Effective Date; January 4, 1973. Closing Date; June 30, 1981.

Project construction was delayed about 2-1/2 years due mainly to

problems in the use of ICB procurement procedures and inefficient management.However, construction moved swiftly in 1977 and the two major water resourcesdevelopment programs were completed in early 1979. Substantial improvements

to the distribution system, required to enable full utilization to be made ofthe new water sources, are under implementation. Tariff increases have beenimplemented recently, and a reorganization of the management, accounting and

financial systems is under consideration.

Ln. and Cr. Nos. 883/360, Ceyhan Aslantas Multipurpose Project; US$44 millionloan and US$30 million credit of March 22, 1973. Effective Date; March 20,1974. Closing Date: December 31, 1981.

Following delays due to difficult rock conditions and inappropriatetunnelling methods, two diversion tunnels have been completed, about two yearsbehind appraisal estimate. The upstream coffer dam has also been completed.

Progress in 1980 was in general satisfactory. The pace of construction of thepower-house was lower than forecast, but is not expected to delay completion.The construction of the irrigation system is progressing, with the system nowready to transport irrigation water to about 30,000 ha, one third of thetarget. On-farm works are progressing steadily, with about 50 percentcompleted. Tile drainage is being delayed until the main drains are located.Staffing of the extension service is satisfactory except as regards consul-tants; the Government is taking steps to hire the latter. Project is expectedto be completed by end 1983.

Ln. No. 893 Turkish State Railways; US$47 million loan of May 25, 1973.Effective Date: August 28, 1973. Closing Date; June 30, 1981.

After initial delays, physical progress, including track renewals,rolling stock, and locomotive production, the latter financed by the European

Investment Bank, is satisfactory. Over 95 percent of the loan has beendisbursed and procurement action has been completed for use of the remainingloan funds. Despite several tariff increases since the loan was made, theRailways have continued to fall short of the financial targets in the revised

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report anyproblems which are being encountered and the action being taken to remedythem. They should be read in this sense, and with the understanding thatthey do not purport to present a balanced evaluation of strengths andweaknesses in project execution.

- 33 -

ANNEX IIPage 4 of 9

Plan of Action agreed with the Bank in mid-1975. However, it is hoped thatfurther increases in passenger fares and freight tariffs averaging 70 to 170percent, which became effective in January 1980, will improve the Railways'financial situation. While the dieselization program is making satisfactoryprogress, other measures to improve operational efficiency, such asappropriate manpower planning, have not been given sufficient attention.Project is expected to be closed on schedule.

Ln. No. 957 Antalya/Akdeniz Forest Utilization Project; US$40 million loan ofJanuary 28, 1974. Effective Date: May 26, 1976. Closing Date: June 30,1982.

Construction is substantially completed. Most of the main ancillaryprocess equipment is in place, but construction is hindered by materialshortages. The project is expected to be completed by January 1982 andproduction commence in mid-year, two and a half years behind the revisedschedule. Sufficient foreign currency is available to complete the project.Local currency payments for the Akdeniz establishment are now being made.Substantial price increases in 1980 should enable the company to meet most ofthe local currency requirements.

Ln. No. 1023 Elbistan Lignite Mine and Power Project; US$148 million loan ofJune 28, 1974. Effective Date; June 1, 1976. Closing Date; July 30, 1982.

Project implementation had been delayed by critical problems,including insufficient staff, inefficient management, inadequate coordinationamong various agencies and unsatisfactory performance of civil contractors.Following continuous Bank and co-lender reviews of the situation with theTurkish authorities from early 1977, the remedial measures initiated by Turkeyresulted in some improvement of project execution, until mid-1979. However,continuing and serious shortage of local funds has affected project progress,which has been aggravated by staff and management deficiencies. The Govern-ment's expected timely provision of adequate local funds for this highpriority project from the Structural Adjustment Loan Counterpart Funds hashelped resume momentum. The colenders and the Government agreed in November1980 on a detailed program of action to overcome remaining implementationproblems; this program is now being implemented.

Ln. No. 1130 Corum-Cankiri Rural Development; US$75 million loan of June 23,1975. Effective Date; January 22, 1976. Closing Date; December 31, 1981.

The project is in general progressing satisfactorily though becauseof disruptions in construction it is probable that the irrigation works willbe completed only by end 1983. Corum dam has been completed as also the worksto divert run-off from 5 nearby watersheds. Kumbaba pumping station is ready,

- 34 -

ANNEX IIPage 5 of 9

and irrigation has started. Alaca dam is expected to be completed by end1981. Damage to the Alaca diversion tunnel, because of rock slides, has beenrepaired and the tunnel lining is almost finished. Contracts for the irri-gation system of the Guldercek area has been awarded and work is in progress.The project extension service is operating successfully and its impact onagriculture is promising. The Government has replaced one of the two vacantconsultant posts. Further construction of village centers is being delayeduntil agreement is reached on satisfactory plan for using and maintainingexisting centers and plans for additional centers are revised.

Ln. No. 1194 Second TEK Power Transmission Project: US$56 million loan ofJune 14, 1976. Effective Date: April, 21, 1978. Closing Date: December 31,1981.

Procurement action is almost complete, somewhat behind schedule, andalmost the entire loan is committed.

Ln. No. 1248 Agricultural Credit and Agroindustries: US$54.3 million loan ofMay 5, 1976. Effective Date; May 11, 1977. Closing Date; September 30,1981.

The ferryship component has been implemented, and the two roll-on androll-off ships purchased under this project and the Fruit and Vegetable Exportproject are now operating a regularly scheduled service between ports inTurkey and two ports in Italy. The implementation of agro-industriescomponent is delayed, mainly due to investors' reluctance to assume theforeign exchange risk. Government is reviewing possible measures to overcomethis problem. The Agricultural Bank (TCZB) has introduced improved lendingprocedures for its ongoing supervised credit program, and this component isbeing implemented satisfactorily. After considerable delay, consultants havebegun the study of TCZB's structure and procedures. At the Borrower'srequest, a cattle-fattening component of the Project, and US$7.7 million ofthe original Loan amount of $63 million allocated for this purpose, werecancelled on May 5, 1977. Also, as provided for in the Loan Agreement, $1.04million for training was cancelled on December 22, 1977, following approval ofUNDP funds for this purpose.

Ln. No. 1258 Balikesir Newsprint; US$70 million loan of May 21, 1976.Effective Date: October 15, 1976. Closing Date: December 31, 1981.

The project is nearing physical completion. The sawmill has begunoperations, although wood supply and marketing problems now must be resolved.Recent price increases have helped to correct the local currency shortagesituation and the project is expected to start production in early 1981, 2years behind the appraisal schedule. Trial production runs have already begun.

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ANNEX IIPage 6 of 9

Ln. No. 1265 Livestock III; US$21.5 million loan of May 26, 1976. EffectiveDate: February 25, 1977. Closing Date: March 31, 1982.

After a slower than anticipated start-up, project implementationimproved but has recently deteriorated due to resource constraints affectingfield staff travel. This has adversely affected the preparation of farmdevelopment plans. Though project area offices have been established, theyare not fully staffed. Government has taken some measures, and is reviewingothers to correct the situation. A higher than expected proportion ofsub-loans has been made to small farmers. The Governmental budget requiredfor 1981 has been approved in its entirety.

Ln. No. 1310 South Antalya Tourism Infrastructure: US$26 million loan ofJuly 9, 1976. Effective Date; March 1, 1978. Closing Date: December 31,1982.

Implementation of most project components is underway, with progressbeing made in preparation of specifications and project design work, althoughthe pace of overall project implementation is somewhat slower than expecteddue to staffing constraints and difficulties in ensuring adequateinter-ministerial and inter-agency coordination. However, measures tostrengthen the Project Unit and its consultants, the Tourism Bank, are beingtaken.

Ln. No. 1379 DYB (State Investment Bank of Turkey): US$70 million loan ofMarch 23, 1977. Effective Date; July 21, 1977. Closing Date; March 31,1982.

The loan is expected to be fully committed in the next few months.DYB still has severe staff constraints, which it has in part overcome byrecruitment of additional junior staff. It hopes improved contract terms willenable it to fill more senior positions as needed.

Ln. No. 1430 TSKB XII (Industrial Development Bank of Turkey): US$74.0million loan of June 3, 1977. Effective Date; August 29, 1977. ClosingDate: December 31, 1981.

Progress is satisfactory and the loan has been fully committed. TSKBhas essentially reached its agreed targets for allocation of its resources toprojects in less developed regions and export-oriented industries. It has sofar been unable to raise resources in international capital markets asexpected because of Turkey's economic difficulties, but the interest ofseveral financing sources is anticipated once conditions permit renewedefforts.

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ANNEX IIPage 7 of 9

Ln. No. 1585 Northern Forestry; US$86.0 million loan of June 5, 1978.Effective Date; October 30, 1978. Closing Date; March 31, 1986.

Industrial wood production for 1979 was close to forecasts but therewere significant shortfalls in some other targets, principally as a result ofGovernment budget cuts. Continuing local resource constraints have adverselyaffected all targets during 1980, causing delays in preparation of forestmanagement plans over about 22 percent of the project area and timely paymentby SEEs' for timber delivery. Foreign procurement is effectively up to datebut local state enterprises have been unable to supply much of the locallyproduced equipment (principally vehicles to replace existing stocks).Consideration is being given to procuring them internationally.

Ln. No. 1586 Livestock IV: US$24.0 million loan of June 5, 1978. EffectiveDate; October 31, 1978. Closing Date; June 30, 1985.

The supervised credit program for farm development has beeninitiated. The milk industry study has been satisfactorily completed.International recruitment of technical specialists, considerably delayed, isunderway, and the staffing requirements agreed upon with the Bank have beenmet. The 1981 budget has been approved in its entirety.

Ln. No. 1606 Erdemir Stage II Steel; US$95.0 million loan of June 30, 1978.Effective Date: July 30, 1979. Closing Date: June 30, 1983.

Procurement for the phenol treatment plant, the raw material handlingsystem and the hot rolled shear line are completed. Product selling priceshave been substantially increased in January 1981. Production from existingfacilities has been severely restricted from time to time because of the lackof raw materials due to the limited availability of foreign exchange.

Ln. No. 1741 Ports Rehabilitation: US$75 million of July 2, 1979. EffectiveDate; January 22, 1980. Closing Date; June 30, 1983.

The project coordinating committee is in place and functioningeffectively. Procurement is making good progress. UNDP has appointed aproject manager to implement the project related training programs. The portsector planning studies have been delayed by lack of staff, but steps arebeing taken to correct this.

Ln. No. 1742 Grain Storage; US$85 million of July 2, 1979. Effective Date;January 21, 1980. Closing Date; June 30, 1985.

Project implementation has begun. Proposals from prequalifiedconsultants for engineering design and supervision of construction are underevaluation.

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ANNEX IIPage 8 of 9

Ln. No. 1748 TSKB XIII (Industrial Development Bank of Turkey): US$60 millionof July 12, 1979. Effective Date: October 25, 1979. Closing Date;

December 31, 1982.

After initial delays, the progress is now satisfactory with over 75percent of the loan committed. TSKB and ITC finalized in November thetechnical assistance program for training and export development is under

implementation.

Lns. Nos. 1754 TSKB (US$65 million) and 1755 SYKB (US$15 million) PrivateSector Textiles loans of September 17, 1979. Effective Date: February 29,1980. Closing Date: December 31, 1984.

Consultants have prepared the preliminary program for localtraining. The additional consultants for technical services and for the

extension services are in place. Revised Action Plans are being prepared.

Approval of sub-projects has begun, and about 25 percent of the loan has beencommitted.

Ln. No. S-15 Ankara Air Pollution Engineering: US$6 million loan ofDecember 12, 1979. Effective Date: April 4, 1980. Closing Date:

December 31, 1983.

Consultants being selected for project studies.

Ln. No. 1844 Karakaya Hydropower: US$120 million loan of May 21, 1980.Effective Date: August 15, 1980. Closing Date: December 31, 1988.

Project implementation is making progress.

Ln. No. 1847 Sumerbank Textiles Modernization and Rationalization: US$83million loan of May 28, 1980. Effective Date: February 27, 1981. ClosingDate: June 30, 1984.

Project implementation has begun. Arrangements for consultants arenearly finalized and procurement actions have commenced.

Ln. No. 1862 Livestock V: US$51 million loan of June 6, 1980. EffectiveDate: October 22, 1980. Closing Date; June 30, 1987.

Project implementation has begun. Consultants are being selected.

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ANNEX IIPage 9 of 9

Ln. No. 1915 Structural Adjustment Loan Supplement: US$75 million loan ofNovember 24, 1980. Effective Date: January 7, 1981.Closing Date; August 31, 1981.

The loan disbursements were $29.2 million as of April 7, 1981.

Ln. No. 1916 Petroleum Exploration Project: US$25 million loan of November24, 1980. Effective Date: June 30, 1981. Closing Date: December 31, 1984.

The loan is not yet effective, but actions are under way to initiateproject implementation.

Ln. No. 1917 Bati Raman Enhanced Oil Recovery Field Demonstration Project;US$62 million loan of November 24, 1980. Effective Date; June 30, 1981.Closing Date; December 31, 1984.

The loan is not yet effective, but actions are under way to initiateproject implementation.

Ln. No. 1952 Labor Intensive Industry Project; US$40 million loan ofMarch 13, 1981. Effective Date: June 12, 1981. Closing Date:June 30, 1986.

The loan is not yet effective.

- 39 -

ANNEX III

Page 1 of 2

TURKEY - FERTILIZER REHABILITATION AND ENERGY SAVING PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

I; Timetable of key events(a) Time taken by country to prepare project: 12 months

(November 1979 -November 1980)

(b) Agency which prepared the project; Government andbeneficiarycompanies assistedby consultantsfinanced by a PPF

(c) First presentation to the Bank: March 1980.

(d) Departure of Appraisal Mission: December 1980.

(e) Negotiations completed: April 1981.

(f) Planned date of effectiveness: September 1981.

II. Special Bank Implementation Actions; None

III. Special Conditions

A. Special conditions of effectiveness;

(i) Execution of Subsidiary Loan Agreements between theRepublic of Turkey and the beneficiaries (para. 72).

B. Special conditions of disbursement:

(i) For Kutahya II and Samsun; Employment by Azot of fouroperational experts (para. 60).

(ii) For Kutahya II; Completion of adequate arrangements toensure the power requirements of the plant (para. 56).

C. Other Main Conditions:

(i) A study of fertilizer marketing and prices to be carriedout by December 31, 1982, an implementation planprepared by June 30, 1983 and changes implemented byJune 30, 1984 after an exchange of views with the Bank

(paras. 38 and 40);

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ANNEX IIIPage 2 of 2

(ii) The Government to ensure producers are paid within fourmonths of delivery to the marketing companies (para. 39);

(iii) A management and operations improvement action programfor Azot to be submitted to the Bank by December 31,1982 and implemented by December 31, 1983 (para. 42);

(iv) The Government to enable Azot to carry out the actionprogram to improve management and operations and togrant Azot sufficient autonomy to do this (para. 42);

(v) Beneficiaries to limit nonproject investments duringproject implementation to $7 million per year for Azotand $5 million per year for IGSAS and Gubre except asBank shall otherwise agree (para. 58);

(vi) Beneficiaries to maintain appropriate financial ratios(para. 67);

(vii) The Government and Azot to establish productionefficiency monitoring and control systems by December31, 1981 (para. 42); and

(viii) The Government to make available the foreign exchangeneeded for importing fertilizer raw materials and spareparts (para. 61).

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